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UPDATE 1-Bayer's gains help European shares hit 4-month high

* STOXX up 0.3 pct, set for fifth straight week of gains

Bayer gains after $7 billion disposal; BASF falls

* Provident Financial, MAN rise after updates

* Profit warning hits UK engineer GKN (Adds details, updates prices)

By Danilo Masoni

MILAN, Oct 13 (Reuters) - European shares hit their highest in nearly four months on Friday, helped by gains in Bayer after an asset sale deal paving the way for the German drugmaker's $66 billion acquisition of Monsanto.

The pan-European STOXX 600 rose 0.3 percent, also underpinned by strength among materials stocks. The index was set for its fifth straight week of gains as inflows into equities continued, with confidence over an economic recovery outweighing rumblings of political risk.

Germany's DAX index was flat, just below the all-time high hit in the previous session, while Britain's FTSE eased back 0.3 percent after a record close on Thursday.

According to EPFR Global data, European equity funds posted solid weekly inflows overall. But Spanish funds suffered their second largest outflow on record and redemptions from Italy climbed to levels last seen in the second quarter of 2015.

Spain's IBEX has lagged over the past two weeks amid concerns over the country's future following an independence referendum in the region of Catalonia declared illegal by authorities in Madrid.

Italy's FTSE MIB has been hit by a sell-off in its banks on worries regulators could impose stricter provisioning rules on bad loans.

On Friday, Bayer gave the biggest boost to the STOXX 600, up 1.6 percent after BASF, the world's third-largest maker of crop chemicals, agreed to buy significant parts of its seed and herbicide businesses for 5.9 billion euros in cash. BASF fell 0.7 percent.

Bayer said it would use the proceeds of the sale to partially refinance the planned acquisition of Monsanto, which it hopes will close in early 2018.

"The recent divestments together with a potential radiology divestment could mean that Bayer only needs a capital raise of below $10 billion which would be a positive surprise," said Baader Helvea analyst Markus Mayer in a note.

Analysts including Mayer said the price paid by BASF was higher than expected but terms of the deal were more favourable compared to market valuation multiples in the same sector.

Bayer is up 19 percent so far this year, against a flat performance for BASF and a 13 percent rise for the DAX.

ACS rose 0.7 percent after sources told Reuters the Spanish builder would launch next week a cash-and-share offer for toll road operator Abertis, complicating a rival bid by Italy's Atlantia.

The offer was expected to be roughly half in cash and the rest in newly issued shares in German construction group Hochtief, which is controlled by ACS, the sources said.

Abertis and Atlantia were flat while Hochtief fell 0.9 percent.

Among top STOXX 600 gainers were Provident Financial , up 18 percent at a six week high. The British subprime lender put in place a recovery plan for its home credit business which it said was set to post a 2017 loss of up to 120 million pounds.

A well-received earnings update boosted shares in Man Group , up 2.8 percent. The British hedge fund said assets rose 7.9 percent in the third quarter, boosted by market gains and net inflows to its funds.

Top faller was British engineering group GKN which fell 6.4 percent after a profit warning. The company said full-year profit would come in lower than expected due to disappointing trading in aerospace and two external claims that were expected to cost 40 million pounds.

(Reporting by Danilo Masoni; editing by John Stonestreet)