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UPDATE 1-European stocks on track for best month this year; Volkswagen tumbles

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* Euro zone stocks at three-month high

* Weaker euro vs dollar helps equities end Q3 on a high

* VW and Porsche sink on N.America settlement provisions (ADVISORY- Follow European and UK stock markets in real time on the Reuters Live Markets blog on Eikon - see cpurl://apps.cp./cms/?pageId=livemarkets)

LONDON, Sept 29 (Reuters) - European stocks, propelled by a weaker euro, were heading for their best monthly gains this year on Friday, but Volkswagen shares sank on further provisions for its diesel scandal settlements.

A weakening euro has taken pressure off Europe's equities and especially the exporter-heavy DAX, helping investors find renewed enthusiasm for the asset class after the slow summer months.

The pan-European STOXX 600 steadied at a two-month high, while euro zone stocks hit their highest in three months, on track for a quarterly gain after falling back in the second quarter.

"Europe is ticking more and more boxes," said Monique Wong, director of global markets at Coutts.

"It's slightly slowed down with the appreciation of the currency but the euro is still a long way below previous highs."

Analysts at Deutsche Bank expect earnings for the STOXX 600 to grow 11 percent in 2017, with the pick-up in global growth and rebound in commodities outweighing the negative effect of the stronger euro.

Credit Suisse upgraded German equities to overweight, saying the weaker euro would support the DAX.

On Friday Volkswagen shares dropped 3 percent after the latest twist in the carmaker's long-running diesel cheating scandal, when it said it was increasing provisions for settlements in North America.

Shares in Porsche, Volkswagen's controlling shareholder, also fell 2.8 percent.

Investors have been weighing the pros and cons of investing in the autos sector, which is undergoing massive disruption as consumers begin to shun diesel and investments into electric vehicles gather pace.

But depressed valuations are tempting to some.

Goldman Sachs upgraded autos to overweight in early September.

"It's a very unloved sector, at a 60 percent discount on price to earnings to the rest of Europe," said Sharon Bell, head of European equity strategy at the U.S. bank.

"The sector has been hit by the strength of the euro as well, given its export focus."

VW and Porsche dragged the sector index down 0.5 percent, but it was still set for its best month this year as cyclical sectors across Europe made gains.

"European cyclicals have outperformed defensives by 5 percent over the past month, overshooting the fair-value levels implied by our models," said Deutsche Bank analysts.

Dutch bank ABN AMRO rose 2.1 percent after Morgan Stanley raised its rating on the stock, saying it expected dividend payouts to increase.

Covestro pared earlier gains to trade up 0.4 percent, after Bayer further reduced its holding in the plastics producer to under 25 percent.

(Reporting by Helen Reid; Editing by Julien Ponthus and Andrew Roche)