* FTSEurofirst 300up 0.5 pct, STOXX 600 up 0.5 pct
* Chemicals companies lifted by merger talk
* Julius Baer slides after tax-dodging charge
* Precious metal miners hit after gold drops to 5 year low (Updates prices)
By Alistair Smout
LONDON, July 20 (Reuters) - European shares rose to six-week highs on Monday as Greece began to return to normality after a deal to agree a new bailout package, with Dutch chemicals firm OCI surging as it confirmed it was in merger talks.
The FTSEurofirst 300 index of European blue-chip stocks was up 0.5 percent, hitting its highest level since May 29 at 1,621.31 points, while the broader STOXX Europe 600 rose 0.5 percent to 407.75 points.
Volatility has been cut in half in less than two weeks on the prospect of a new deal to resolve Greece’s debt crisis, with Monday marking a first step in reopening Greek banks and paying off billions of euros owed to international creditors.
“(There is) ongoing progress in the Greek debt crisis following the deal agreement last week,” Nomura strategists wrote.
OCI was the top gainer, up 17 percent after the Amsterdam-listed company confirmed it was in advanced merger talks with U.S. fertiliser maker CF Industries Holdings Inc .
Norwegian peer Yara International rose 2.6 percent. Yara sold a 50 percent stake in its British fertiliser manufacturer to CF Industries, its joint venture partner, three weeks ago and traders said further M&A activity could follow.
“CF held talks with Yara last year ... and we still see the potential for continual activity in this space,” said Atif Latif, director of trading at Guardian Stockbrokers.
Swiss asset manager Julius Baer fell 2.6 percent after its first-half net profit slid.
The firm took a $350 million charge towards an expected settlement in a U.S. criminal investigation into how the Swiss bank helped wealthy Americans dodge taxes.
Precious metal miners also came under pressure, with Fresnillo down 4.1 percent after gold hit a five-year low.
Greek banks were reopening their branches across the country on Monday after a three-week shutdown, officials said, although the Athens Stock Exchange remained closed.
German Chancellor Angela Merkel called on Monday for swift aid talks so Athens could also lift withdrawal limits, adding it would be possible to talk about changing the maturities of Greece’s debt or reducing the interest Athens has to pay after the first successful review of the new bailout package.
Euro zone banks rose 1 percent.
But while the market was still being supported by progress towards an agreement to save Greece from bankruptcy, traders warned the market might pause after the recent rally, exposing “long” bets on a rising market to future falls.
“The general market is still reacting positively to the Greek news,” Guardian’s Latif said.
“Given the rally we have seen in the broader European market we see this an opportune time to trim longs and add some downside protection.”
Europe bourses in 2015: link.reuters.com/pap87v
Asset performance in 2015: link.reuters.com/gap87v
Today’s European research round-up
Editing by Catherine Evans