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UPDATE 1-European shares hover at 12-month high on Italy relief, trade optimism

Medha Singh

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* Metso gains on plans to merge Minerals unit with Outotec

* Osram rises after confirming takeover bid from Bain and Carlyle

* Italian banks climb after favourable EU decision (Adds analyst comment, details; Updates prices)

July 4 (Reuters) - European shares hovered at more than one-year high on Thursday as Italian banks gained on relief that the country avoided a EU disciplinary action over its public finances and investors took heart from signs that U.S.-China trade talks were back on track.

By 0813 GMT, the pan-European STOXX 600 index was flat, while the euro zone's STOXXE edged 0.1% higher, a day after the bourses hit fresh 2019 peaks on hopes that France's Christine Lagarde will stick to ECB's dovish stance as the bank's next chief.

Milan's FTMIB hit a fresh two-month peak, while its bank index climbed about 3% after Italy persuaded the European Commission that new measures submitted this week would help bring its growing debt in line with EU fiscal rules.

While Italy has dodged the bullet for now, the ghost of a disciplinary action could be back in the autumn when the 2020 budget will be drafted, said ING senior economist Paolo Pizzoli.

"As things stand, crafting a fiscally sound 2020 budget will prove challenging."

Trading volumes are likely to be thin as U.S. financial markets remained shut for Independence Day. The three main Wall Street indexes clinched fresh record closing highs a day before, as a spate of weak economic data firmed up bets that the U.S. Federal Reserve would cut interest rates to spur growth.

Expectations of lower borrowing costs have helped European equities recover from May's losses and resume their 2019 rally. The STOXX 600 is up more than 16% this year.

Meanwhile, trade-sensitive autos sector rose 0.5% on news that top representatives from the United States and China are arranging to resume talks next week.

Also helping the auto stocks were gains in shares of French car parts company Valeo after it won 500 million euros ($564 million) worth of orders for its 'Lidar' car sensor products.

Dealmaking aided the sentiment with Finnish engineering group Metso up more than 3.8% after the company said it would merge Outotec with its main Minerals unit to create a larger engineering firm serving the minerals, metals and aggregates industries.

In Germany, Osram rose 2.6%, extending Wednesday's more than 10% jump after the lighting company confirmed it had received a takeover offer of 3.4 billion euros ($3.84 billion) from Bain and Carlyle.

British Airways-owner IAG and Coca-Cola HBC were the top decliners on the pan-European benchmark index as their shares were trading ex-dividend. (Reporting by Medha Singh in Bengaluru; Editing by Arun Koyyur)