UPDATE 1-Mediaset deal with Sky gets thumbs up from investors

(Adds analyst comment, details on the deal)

MILAN, April 3 (Reuters) - Shares in Mediaset rose more than 7 percent on Tuesday after the Italian broadcaster signed a content deal with Sky's Italian unit on Friday, paving the way for a possible sale of part of Mediaset's pay-TV business to Sky.

Under the agreement, some of Mediaset's Premium pay-TV channels will be aired on Sky Italia's satellite platform, while Sky will be able to offer customers its own services on the Milan-based TV group's digital platform.

The deal also gives Mediaset the option later this year to give Sky control of a vehicle holding technical, maintenance and operational assets of Premium.

"As well as increasing profitability, this deal ends the uncertainty as to the future of Premium, which has been a significant cause of share price volatility in the past," analysts at Berenberg said in a research note.

The broker raised its price target on Mediaset stock to 3.80 euros from 3.20 euros and upgraded it to "Buy" from "Hold".

At 0820 GMT, the shares were up 6.8 percent at 3.33 euros, while the blue-chip FTSE MIB index in Milan was down 0.5 percent.

Mediaset's struggling pay-TV business has changed its strategy for on-demand offerings away from expensive, premium sports content after a deal to sell it to France's Vivendi , signed in April 2016, fell through three months later.

The French media giant, which is also the top shareholder in Italy's former phone monopoly Telecom Italia, now holds just under 30 percent of Mediaset and is entangled in a legal row with the broadcaster.

The deal between Mediaset and Sky could complicate Vivendi's ambition to create a European rival to online providers such as Netflix, using its influence at Telecom Italia to deliver content.

Premium, once attractive to customers for its soccer channel programming, will stop airing matches at the end of June, when its rights to broadcast the European Champions League competition expire.

Last Thursday, Sky Italia signed a long-term deal with broadband company Open Fiber that will allow it to offer internet TV in Italy. (Reporting by Giulia Segreti and Francesca Landini; Editing by John Stonestreet and Mark Potter)