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Steelmakers lead as euro zone shares extend ECB rally

* Euro STOXX 50 up 0.7 pct

* Index on course for year's biggest two-day gain

* Investors buy market dips on ECB stimulus bet

* Steelmakers boosted by UBS upgrade

LONDON, Aug 26 (Reuters) - Euro zone blue chips were on track to record their best two-day gain this year on Tuesday, boosted by the prospect of further stimulus from the European Central Bank (ECB) and by strong gains for some steelmakers.

The euro zone's Euro STOXX 50 index was up 0.7 percent at 3,188.18 points by 1441 GMT, setting it on course for its biggest two-day rise since December 2013 at 2.9 percent.

Shares on both sides of the Atlantic have been boosted by comments from ECB President Mario Draghi, who was seen as having opened the door to a large-scale asset-buying scheme known as quantitative easing, or QE, to pump cash into the financial system and revive inflation.

"Draghi's readiness to do more is providing the necessary boost for equity indexes," Ashraf Laidi, chief global strategist at City Index, said.

"Buying on the dips does remain the path of least resistance in the absence of any destabilizing factor."

A two-year rally in European stocks, fueled by central banks' largesse, had started lose steam in June as euro zone data started to deteriorate and investors fretted over a possible tightening in U.S. monetary policy.

Speaking on Friday at a global central banking conference in the United States, Draghi said the ECB was prepared to respond with all its "available" tools should inflation drop further.

Indexes in economies such as Italy, Spain and Portugal, suffering from high public debt and low inflation, led gains with rises of between 1 percent and 1.4 percent.

European bourses extended gains after a positive start on Wall Street, where the globally tracked S&P 500 index rose to a new high, sending a bullish signal for equities at large.

Steelmakers ArcelorMittal, Salzgitter and Voestalpine were among top gainers in Europe after analysts at UBS upgraded their shares to "buy" from "sell" in expectation that the trio will benefit from a turnaround in the sector.

FRENCH RESHUFFLE

The possibility of fresh ECB stimulus also helped the market to take a French government reshuffle in its stride. Paris's CAC-40 index was up 1.1 percent, having risen 2.1 percent the previous day.

France's Prime Minister Manuel Valls was expected to put together a new pro-reform government on Tuesday, having resigned the previous day after President Francois Hollande's eviction of rebel ministers who had opposed budgetary rigor.

"The visibility on what Mr Hollande has been willing to implement was getting weaker because of divergence within the government, so he has solved this issue," said Fran├žois Duhen, director of dedicated research at CM-CIC Securities in Paris.

"I'd say it's more positive than negative if they manage to convince enough members of parliament. But if they cannot find a majority ... then we will head for significant trouble."

Europe bourses in 2014: http://link.reuters.com/pap87v

Asset performance in 2014: http://link.reuters.com/gap87v

Today's European research round-up

(Additional reporting by Blaise Robinson in Paris; Editing by David Goodman)