* Pan-European STOXX 600 index up 0.6 percent
* PMI surveys underpin broader stock markets
* DAX surges back to May 2015 levels
* HSBC slumps after plunge in pre-tax profits (Adds details, closing prices)
By Atul Prakash and Danilo Masoni
LONDON/MILAN, Feb 21 (Reuters) - European shares rose to their highest in over 14 months on Tuesday, with optimism generated by encouraging manufacturing surveys outpacing a steep decline in HSBC shares after a slump in the heavyweight bank's annual pre-tax profit.
Europe's biggest bank dropped 6.5 percent and scored its biggest one-day fall in eight years after its results fell far short of analysts' estimates as it took hefty writedowns from its restructuring.
HSBC has been among the best-performing European banks since Britain voted last June to leave the European Union, climbing more than 50 percent against a 28 percent increase in the European banking index as the bank benefited from appreciation of the U.S. dollar and stronger capital levels.
"The bank is a shining example of how the decline in sterling has bumped up the price of some of the UK's largest companies, without much progress in underlying profits," said Laith Khalaf, senior analyst at Hargreaves Lansdown.
"Despite an underwhelming set of full year results, HSBC is making progress in de-risking and restructuring, and ultimately the bank's focus on the Far East could be its trump card if the Chinese economy starts to fire on all cylinders."
HSBC was the biggest decliner in the European banking index, which fell 0.9 percent and capped broader stock market gains. The pan-European STOXX 600 index rose 0.6 percent after falling earlier in the session.
Britain's FTSE 100 index, dominated by several global banks, underperformed. It fell 0.3 percent following an over 3 percent plunge in the UK banking index.
However, Germany's benchmark DAX index rose 1.2 percent to its highest level since May 2015, underpinned by a survey showing growth in the country's private sector picked up in February to reach its highest in nearly three years, driven by humming factories.
Euro zone private sector and manufacturing growth also unexpectedly accelerated to near a six-year high in February and job creation reached its fastest since August 2007, propelled by strong demand and optimism about the future.
But investors stayed concerned about the political risk. They have been rattled by the prospect of anti-euro, far-right leader Marine Le Pen staging another political surprise in the race for the French presidency, with a poll on Monday showing her closing the gap with centrist opponents.
Shares moves on Tuesday remained mixed.
Mid-cap firm John Wood dropped 7.9 percent, the biggest faller in the STOXX 600, after saying that oil and gas markets continued to present challenges and that it remained cautious on the near term outlook.
French oil storage and distribution company Rubis was up 4.6 percent after the company said a would buy Dinesa and its subsidiary Sodigaz, a fuel products distributor in Haiti.
Shares in Italian asset manager Mediolaum fell 6.7 percent, their worst day in eight months, with a trader citing warnings from CEO Massimo Doris that a new way to calculate performance fees could put earnings and dividend at risk next year. (Reporting by Atul Prakash; Editing by Alison Williams)