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UPDATE 1-Capgemini deal soothes nervy European markets

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U.S. sanctions on Khamenei mean end of diplomacy- Iran

* Capgemini surges as analysts welcome takeover of Altran

* Bank stocks fall as Euro zone yields test lows (Adds comment, updates prices)

By Amy Caren Daniel and Medha Singh

June 25 (Reuters) - The multi-billion euro merger of two of Europe's big business consultancies capped losses for its major stock markets on Tuesday as Middle East tensions and doubts about the chances of progress in U.S-China trade talks this week weighed on sentiment.

The pan-European STOXX 600 index dipped 0.13% in the first hour of trading, but the technology sector was up around half a percent on the back of Capgemini's purchase of smaller rival Altran for 3.6 billion euros.

After three weeks of solid gains that have reclaimed almost all of a May sell-off that generated European shares' worst monthly performance in more than two years, sentiment remained shaky.

President Donald Trump targeted Supreme Leader Ayatollah Ali Khamenei and other top officials with sanctions on Monday in a move Tehran said closed the path to diplomacy between the countries.

A U.S. official also said on Monday that Trump was "comfortable with any outcome" from talks with Chinese President Xi Jinping when they meet at a G20 summit this weekend, cooling hopes for a substantive breakthrough.

"The U.S. ... communicated that the market shouldn't put up their hopes too high for the coming G20 meeting," said Teeuwe Mevissen, a senior market economist at Rabobank.

"The maximum that can be achieved is a temporary truce like they did last time where they also decided to stop at least raising tariffs further."

Capgemini shares rose as much as 7% as dealers welcomed the acquisition of Altran, which the company expected will contribute to its earnings from year one. Shares in Altran itself surged 21.2% to reflect the selling price.

In other M&A news, SMCP fell 0.3% as the French fashion group agreed to buy men's luxury clothing company De Fursac, in a deal which it said would boost its earnings and fit in well with its other existing brands such as Sandro.

The banking sector, tumbled 1%, the most among major European sectors as euro zone government bond yields stayed moored near record lows ahead of a handful of speeches by U.S. Federal Reserve policy makers, including Chair Jerome Powell.

The Fed is facing pressure from U.S. President Donald Trump to cut rates sharply in the face of a slowing economy and markets now believe firmly that the panel will do so in July.

Any indication to the contrary would be likely to drive up short-term bond yields while also weakening stock markets, whose rally this month has been driven by expectations of more stimulus from both the Fed and the European Central Bank.

"A lot of the central bank news is priced into equities and investors are now taking a step back to evaluate why central banks have turned more dovish," said David Holohan, a strategist at Mediolanum Asset Management in Dublin.

"We are dependent on Asia in a lot of ways to generate growth because Europe continues to be quite sluggish, US is cooling, and unfortunately Asia is where a lot of tariffs are aimed at. ... Does that not mean earnings multiples need to be lower and prices drift down? Valuations are quite high." (Reporting by Amy Caren Daniel in Bengaluru and Helen Reid in London; editing by Patrick Graham)