* Euro STOXX 50 down 0.7 pct at 2,805.27 points.
* Italian stocks weigh on government crisis threat
* Index still heading to around 3,000 in next
* Volume thin as London market shut for holiday
By Francesco Canepa
LONDON, Aug 26 Italian stocks led euro zone
shares lower on Monday as the risk of a new government crisis
fuelled a selloff in companies exposed to Italian sovereign debt
and posed risks to the country's still weak economy.
Italy's FTSE MIB share index was down 1.6 percent
after members of Silvio Berlusconi's centre-right party warned
they would bring down the government if the former premier is
expelled from parliament over a recent conviction.
The threat of a government crisis raised the prospect of a
new wave of political instability that could delay the country's
economic reform and dash growing expectations for a pickup in
the economy. Early signs of economic improvement have helped the
FTSE MIB rise 6.8 percent in the last month, outperforming
Germany's DAX and France's CAC.
"It doesn't look like the politicians will find a compromise
to get out of this crisis, which in turn puts all measures that
need to be taken to spur the economy on ice," a Milan-based
Italian banks UniCredit and Intesa Sanpaolo
, fell around 4 percent, as investors worried about
their holdings of Italian sovereign bonds, which fell in value
on the secondary market.
The two stocks were the biggest drag on the euro zone Euro
STOXX 50 index, which was down 0.7 percent at
The reaction in Italian banking stocks, which have risen
14.7 percent since the start of the year, was magnified by
underlying concerns about some of their other assets, which will
come under scrutiny in an upcoming review of euro zone banks to
be carried out by the European Central Bank.
"I wouldn't sell Italian sovereign bonds on the back of the
latest government tensions," the head of strategy at an Italian
investment bank said. "Banks, however, have got a few more
problems of their own, such as the asset quality."
A recent improvement in data on the euro zone economic has
helped the Euro STOXX 50 rise around 8 percent since the start
of July, or more than twice as much as the U.S. S&P 500.
"It may take a few of days to build a base but it looks like
we're going to have another top for 2013 in Europe," said
Valerie Gastaldy, head of Paris-based technical analysis firm,
Day-by-Day. She expected the Euro STOXX 50 to reach around 3,000
points in the next month.
Volume on the Euro STOXX 50 was thin at 27 percent of its
90-day average at 1054 GMT, partly because London financial
markets were closed for a public holiday.