European shares lifted by banking stocks, M&A hopes boosts Telecom Italia

* Telecom Italia up on sector consolidation prospects

* Credit Agricole rises on cost-cutting plans

* Volkswagen underperforms as company faces US subpoena (Adds details, updates share prices)

LONDON/MILAN, March 9 (Reuters) - European shares rose on Wednesday with banking stocks among the leading gainers on expectations about European Central Bank stimulus measures and Telecom Italia boosted by talk about a possible tie-up with Orange.

The pan-European FTSEurofirst 300 index, which fell 0.9 percent on Tuesday to around its lowest level in a week, rose 1 percent by 1118 GMT, while the euro zone’s blue-chip Euro STOXX 50 index was up 1.3 percent.

The FTSEurofirst remains down by around 7 percent since the start of 2016, with stock markets having been hit by signs of a slowdown in China, the world’s second-biggest economy, weaker euro zone data and concerns over Europe’s banking sector.

But some investors said sentiment was helped by expectations of more monetary stimulus measures from the ECB on Thursday.

The ECB is expected to make a 10 basis-point cut to push its deposit rate, taking it deeper into negative territory, while some type of adjustment of the central bank’s 1.5 trillion euro asset purchase programme is also seen as a near certainty.

The bank sector index rose 1.5 percent with Credit Agricole leading the way with a 3.6 percent gain after the French bank pledged to boost cost savings by 2019.

Elsewhere in the sector, Italy’s Intesa Sanpaolo and Societe Generale of France both rose more than 2 percent, while Spain’s Bankiter added 1.8 percent.

Edmond de Rothschild AM fund manager Guillaume Rigeade said the ECB could also unveil targeted support measures for banks to prevent rate cuts from eating further into their profitability.

“The ECB has fostered a climate of confidence and has the means to stop any new banking crisis degenerating into systemic territory,” he said in a note.

Earlier this week, Anthilia Capital Partners fund manager Giuseppe Sersale said he saw a 60 percent chance of a new bank fund scheme being introduced and just a 25 percent chance the ECB could broaden its asset purchase programme to bank bonds.

Telecom Italia was one of the best-performing stocks in Europe, rising around 4 percent after comments by Italian and French leaders that they wanted to create major companies that can compete in Europe.

The comments followed remarks by the head of French telecoms company Orange that he might look into a possible merger deal with Telecom Italia if its top shareholder Vivendi invited him to.

Volkswagen shares fell as much as 3 percent as an analyst warned the carmaker might need to make a big cut to its dividend to help pay for the growing number of regulatory and judicial probes over its emissions test cheating. The stock was last little changed.

Today’s European research round-up (Editing by Toby Chopra)