February 14, 2017 / 6:20 PM / a year ago

M&A hopes drive auto stocks higher as European shares steady

* European shares pause after five-day rally

* STOXX index ends flat, staying close to 13-month high

* French automaker PSA to buy GM’s European operations

* Shares in UK engineer Rolls-Royce drops after record loss (Adds details, closing prices)

By Danilo Masoni

MILAN, Feb 14 (Reuters) - European shares steadied on Tuesday, as gains in the auto sector on news that PSA Group is in talks to buy General Motors’ European auto operations and stronger banking stocks offset weaker consumer and pharma stocks.

The pan-European STOXX 600 index ended flat at 370.2 points, staying near 13-month highs hit in the previous session when the index rose for its fifth session in a row.

Shares in PSA Group rose 4.3 percent to an 18-month high after the French car maker said it was in talks to buy GM’s European brands Opel and Vauxhall in a move that could shake up the global auto industry.

“If the PSA–Opel deal were to go ahead it would certainly fuel additional M&A speculation,” said JP Morgan analyst Jose Asumendi in a note. He mentioned as possible effects of any deal a sale by PSA of Faurecia and a fresh attempt by Fiat Chrysler to merge with General Motors in North America.

Fiat Chrysler rose 4.1 percent and Faurecia rose 0.7 percent. The auto sector index rose 1.1 percent, making it the biggest sectoral gainer in Europe.

Banks were also strong, up 1 percent to a one-week high as the sector was supported after Federal Reserve chair Janet Yellen struck a hawkish tone on the timing of an interest rate hike.

The sector was also helped by a 2.3 percent rise in Credit Suisse as investors cheered to a better-than-expected capital ratio at the Swiss bank.

Frozen baked goods maker Aryzta was the top gainer on the STOXX, surging 11.5 percent after the company’s chief executive said he was stepping down, three weeks after the stock had its worst ever day after a profit warning.

Consumer staples and healthcare sectors were the biggest weight to the pan-European index. Losses in food company Nestle and drugs firm Roche resulted in the Swiss blue chip index SMI, where they are listed, to fall by 0.4 percent.

Shares in engineering firm Rolls-Royce was another weak spot, down 4 percent, after the company announced an annual 4.6 billion pound loss, hit by a fine to settle bribery charges and by losses on its currency hedges.

Sweden’s online gaming firm Kindred Group was up 10 percent after its quarterly profit topped forecasts, while German industrial services group Bilfinger rose 3.9 percent after it reinstated a dividend and beat expectations for 2016 net profit. (Reporting by Danilo Masoni; additional reporting by Helen Reid in London, editing by Pritha Sarkar)

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