* STOXX up 0.4 pct, posts 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 at close)
LONDON/MILAN, Oct 13 (Reuters) - European shares hit their highest in nearly four months on Friday, helped by gains in Bayer, after the German drugmaker sold assets that will pave the way for its acquisition of Monsanto.
The pan-European STOXX 600 ended the session up 0.4 percent, also underpinned by strength among steel-exposed materials stocks, with ArcelorMittal jumping 7.4 percent.
The index also marked its fifth straight week of gains. Money continued to flow into stocks as confidence in economic recovery outweighed political risk.
European equity funds posted solid weekly inflows overall, according to EPFR Global data. 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.
Germany's DAX hit a record high and closed with a 0.1 percent gain. Britain's FTSE slipped 0.3 percent after a record close on Thursday.
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 <.FTMIB< has been hit by a sell-off in its banks on worries regulators will impose stricter provisioning rules for bad loans.
Bayer was one of the biggest boosts to the STOXX 600, up 1.2 percent after BASF agreed to buy parts of its seed and herbicide businesses for 5.9 billion euros in cash. BASF fell 0.5 percent.
Bayer said it would use the proceeds of the sale to partly refinance the planned $66 billion 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 the terms of the deal were more favourable compared with 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.
Among top STOXX 600 gainers were Provident Financial , up 12.5 percent. 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 ($159.60 million).
A well-received earnings update boosted shares in Man Group , up 3.4 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.
The biggest decline was British engineering group GKN , which fell 9.8 percent after a profit warning. The company said full-year profit would come in lower than expected because of disappointing trading in aerospace and two external claims that were expected to cost 40 million pounds . ($1 = 0.7519 pounds)
(Reporting by Danilo Masoni; editing by Larry King)