* Yields on Italian bonds rise, stocks slide
* Italian bank index ends at lowest close since early February
* Greek stocks extend gains on poll optimism, banks soar (Updates to close, recasts, adds graphic, quote on Greek banks)
By Aaron Saldanha
May 28 (Reuters) - European shares dipped on Tuesday, with bank stocks capturing investors’ attention as concerns about a possible fine on Italy due to the indebted country’s yawning budget deficit exacted a heavy toll on risk sentiment.
The pan-region STOXX 600 fell 0.2%, with banks shedding 0.4% and chemicals stocks declining 1%.
London-listed shares edged down as they traded for the first time this week, while Germany’s DAX ended 0.4% lower, matching the decline in Paris-traded equities .
Milan-traded stocks slid 0.5%, with the country’s deputy prime minister saying the European Commission could slap a 3 billion euro ($3.35 billion) fine on the country for breaking EU rules due to its rising debt and structural deficit levels.
Matteo Salvini’s comments sent yields on Italy’s bonds broadly higher while pushing the country’s banking stocks in the other direction.
Italy’s banking index dropped 1.2% to its lowest closing level since early February.
“For Italy, the potential for a doom loop is still looming in the background where you have an undesirable connection between the debt possession of the state and the banks,” said Teeuwe Mevissen, senior eurozone market economist at Rabobank.
In contrast to Italian lenders, Greece’s banks powered Athens-traded stocks 2.3% higher, to a more than one year closing high on hopes a more business friendly government will emerge from a snap election called on Monday.
Piraeus Bank surged 15% to lead the benchmark’s gainers, followed by Eurobank Ergasias SA, with a 9.8% rise.
UBS Analyst Anastasia Solonitsyna wrote in a note that if the New Democracy party wins the impending election, Kyriakos Mitsotakis would likely be the new Prime Minister.
Mitsotakis’ stated policy intentions could be interpreted as business-friendly and favourable for banks, she wrote, citing a proposed corporate tax cut and focus on “attracting foreign investments which might further boost domestic lending”.
Vienna-traded equities declined 0.2%, a day after conservative Chancellor Sebastian Kurz fell victim to the first successful no-confidence motion against an Austrian government since the country regained its independence in 1955.
Tempering the gloom on European bourses, stocks of auto-makers and their suppliers rose for a third straight session, adding 0.7% on the day.
Traders cited a report in China stating the southern province Guangdong has launched stimulus measures to boost car sales and relax curbs on car purchases.
Peugeot added 4.6% while Knorr Bremse rose 1.6%.
($1 = 0.8952 euros)
Reporting by Aaron Saldanha in Bengaluru and Danilo Masoni in Milan, editing by Ed Osmond