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* Pan-European STOXX 600 bounces 2.6 percent
* Index had slumped 11 percent in previous two days
* Lloyds surges as financials lead market rebound
* Volkswagen rises after U.S. settlement deal
By Sudip Kar-Gupta and Danilo Masoni
LONDON/MILAN, June 28 (Reuters) - European shares rose for the first time in three days on Tuesday after a heavy sell-off following Britain's shock vote to leave the European Union, with battered financial stocks leading the bounce.
The pan-European STOXX 600 index, which had slumped 11 percent in the last two sessions, ended up 2.6 percent, while the pan-European FTSEurofirst 300 index rose 2.4 percent.
Insurance and banking stocks climbed, after suffering the worst of the market rout. Legal & General was up almost 8 percent after it said its balance sheet had proved resilient to the Brexit vote and it had trimmed its exposure to riskier assets beforehand.
Elsewhere among financials, Lloyds, Bankia and Intesa rose between 4.8 percent and 8.3 percent, but UBS fell 2 percent, weighed down by price target cuts, and UniCredit declined 1.5 percent, giving up earlier gains in the last stretch of the session.
Shares in Volkswagen rose 1.7 percent after the German automaker agreed to pay more than $15.3 billion to settle charges that it cheated on U.S. diesel emissions tests. Baader Bank analyst Klaus Breitenbach said the deal removed some uncertainties but he remained cautious on the stock due to other outstanding legal risks.
Shares in oil majors also advanced to add a further stabilising effect to the market, with oil prices climbing as a looming strike in Norway threatened to cut output in western Europe's biggest producer.
Clairinvest fund manager Ion-Marc Valahu said one factor helping to calm investors was the lack of any evident rush among British and European politicians to invoke Article 50 of the EU's Lisbon Treaty, which sets out the process for a state to leave the bloc.
"Given the magnitude of the sell-off we had in the last two days, it was natural that we would rebound, and the fact that there is no rush to trigger Article 50 is helping to calm things down a bit," Valahu said.
Others remained wary of buying into the rally, pointing to persistent pressure on the British market, such as a downgrade of the United Kingdom's credit rating from Standard & Poor's.
"This looks like a classic dead cat bounce," ETX Capital's head of trading, Joe Rundle, said. (Editing by Louise Ireland)