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UPDATE 2-European shares fall as euro surge, Russian tensions weigh

* STOXX down 0.7 percent at 13-month low

* Italy underperforms on political worries

* Russian exposed stocks mixed

* Precious metals miners Fresnillo leads gainers (Recasts, adds details, closing prices)

MILAN, March 26 (Reuters) - European shares fell on Monday as a late surge in the euro and diplomatic tensions with Russia more than offset hopes that the protectionist shift in U.S. trade policy may be more selective and tactical than first feared.

The regional STOXX 600 benchmark fell 0.7 percent to its lowest level since February 2017, having earlier gained as much as 0.6 percent following reports the United States and China had quietly started negotiations to improve U.S. access to Chinese markets.

"Exemptions on steel/aluminium tariffs have already been granted for other important trade partners, which suggests the U.S. president is using this approach more for negotiating leverage rather than any real intention to start a global trade war", said Accendo Markets head of research Mike van Dulken. He noted that China's response so far was "measured" and "nuanced".

European equity markets however slipped into negative territory as the euro gained further strength. Traders said sentiment was also dented by growing diplomatic tensions between Western countries and Russia.

"Despite a bright opening in the U.S. with Wall Street seeing early gains of over 1.5 percent, increased geopolitical tensions with Russia ensured that volatility was alive and kicking," said Fiona Cincotta, Senior Market Analyst at City Index.

The United States said on Monday it would expel 60 Russian diplomats, joining governments across Europe punishing the Kremlin for a nerve agent attack on a former Russian spy in Britain that they have blamed on Moscow.

A sales trader at a European brokerage however said he did not see how these tensions could have any big impact on global economic growth.

Stocks exposed to Russia were mixed. Raiffeisen rose 2.5 percent, helped by a price target upgrade at Deutsche Bank, while Renault gained 0.3 percent, Carlsberg slipped 0.5 percent, and Buzzi Unicem dropped 3.2 percent.

Among other European benchmarks, Spain's IBEX dipped only 0.1 percent, after the country's second ratings upgrade of the year led to a further outperformance of its bond market over euro zone peers.

Italy's FTSE MIB underperformed, down 1.2 percent, as speculation grows the anti-establishment 5-Star Movement and anti-migrant League might explore an alliance to form a government.

The political uncertainty triggered a rise in Italian bond yields.

Italian banks, widely used as proxies to trade political risk in the country, fell 1.7 percent.

Elsewhere, Fresnillo rose 4.6 percent to lead gainers on the STOXX after an upgrade to "buy" from Goldman Sachs, which also added the miner to its "conviction list".

Other top gainers were Zurich Insurance and Indivior, both up more than 3 percent.

Smurfit Kappa fell 3.4 percent after it rejected a revised takeover offer from International Paper. (Reporting by Danilo Masoni Additional reporting by Julien Ponthus Editing by Andrew Heavens)