* Cartel probe dents VW, BMW, Daimler shares
* Autos stocks among worst-performing this year
* But Q2 earnings forecasts bright
* Depressed valuations should be attractive
* Investors avoiding sector seen as risky
LONDON, July 24 (Reuters) - Another wobble for European autos shares on Monday has put the regional sector on track for its worst two-day run in more than a year pointing to heightened investor caution ahead of results due over the coming week.
Shares of Europe's leading carmakers fell on Monday following news that EU anti-trust regulators were investigating possible cartel action amongst them, in the latest probe of a sector whose reputation has been sullied by emissions cheating.
While analysts do not see more massive fines emerging from these investigations and still expect the coming quarter's earnings reports to be relatively solid, investors appear to be steering clear of the sector.
Broadly, earnings expectations for the coming quarter are upbeat and valuations, at less than eight times forward earnings, remain well below their long-term averages, according to Thomson Reuters data.
But this has not been enough to tempt investors concerned about the investigations amid a widespread consumer backlash against diesel.
"In my numbers and from what Ive seen in consensus, we are going to see very decent numbers. I am afraid that this will be completely overshadowed by the negative news flow," said Georges Dieng, an autos analyst at Natixis.
"Frankly who would have thought of a cartel? Its the kind of risk you simply cant quantify, so you think youd be better off moving to another sector with more visibility and when the dust settles you can come back."
A strengthening euro, which has dented appetite for export-oriented sectors in recent weeks, has put the brakes on earnings forecast upgrades for autos, which have enjoyed a stellar run over the past year on the back of rebounding sales in China and as a European economic recovery gained traction.
European autos' shares are down 1.6 percent in 2017, putting them among the worst performing sectors across the market.
Daimler shares are the biggest laggards, down more than 7 percent with rival BMW flirting with losses for the year after Monday's slide.
"With the allegations as yet far from nefarious, we do not see justification for a new record EU cartel fine," said Exane's Stuart Pearson, a top-ranked analyst on Daimler according to Thomson Reuters data, in a note to clients.
"However, more ugly details could yet emerge, leaving German OEMs (original equipment manufacturers) - and the EU auto sector - still firmly in the sin bin for now," Pearson warned.
Sentiment around auto makers that have invested heavily in diesel has suffered since the first allegations of emissions cheating at Volkswagen in 2015.
"The emissions scandal popped up with Volkswagen and now we have investigations into all the European OEMs," said Michael Punzet, autos analyst at DZ Bank.
Investigations into carmakers multiplied from early this year when French and German prosecutors began probing Renault , PSA Group and Fiat Chrysler over suspected diesel-emissions cheating. The companies deny any wrongdoing.
In May, the U.S. government filed a civil lawsuit accusing the Italian carmaker of illegal use of software to bypass emission controls.
Jefferies analysts estimated the maximum possible fines, capped under EU rules at 10 percent of group annual turnover: BMW could be made to pay a maximum of 9 billion euros, Daimler 16 billion and Volkswagen 24 billion.
Some analysts, however, still see the valuation argument as compelling enough to stick with autos.
Bernstein equity strategists pointed out the sector trades at more than one standard deviation below its historical average on price-to-book, and large valuation discounts have in the past been linked with strong future outperformance.
Earlier on Monday analysts at the brokerage upped their allocation to autos in their regional portfolio.
Daimler is scheduled to report second quarter earnings on Wednesday, followed by Volkswagen on Thursday and BMW next week. (Reporting by Helen Reid; Editing by Alison Williams)