By Helen Reid
LONDON (Reuters) - Italian stocks turned from a drag into a boost for European markets on Wednesday as signs the government would target a lower budget deficit quelled investors' fears of a damaging showdown with the European Commission.
Italian bank stocks jumped as much as 3 percent after government bond yields fell back and the spread to Bunds narrowed thanks to reports the government was targeting a lower budget deficit in 2020 and 2021.
Still in the thrall of developments on the Italian front, the leading euro zone stocks index and the pan-European STOXX 600 climbed 0.3 percent with bank stocks the best-performing, up 0.8 percent.
Italy's FTSE MIB outperformed, up 0.5 percent with the banks index last trading up 0.7 percent.
Unicredit and Intesa Sanpaolo were among the top gainers, up 2.6 percent each, while Mediobanca, UBI Banca, and Banco BPM also rose as much as 5 percent.
Banks, which have large sovereign bond holdings, suffer the most from selloffs in the bond market and the index saw its fifth consecutive day down on Tuesday before news the government was aiming for a lower budget deficit.
"Any indication from the government that may deny such indications and lead to a step up in confrontation will negatively affect BTP spreads," said Unicredit analysts.
"The situation remains fluid and mood can make sudden U-turns, depending on a rather unpredictable news flow."
Outside politics, Oslo-listed aluminium firm Norsk Hydro was the biggest faller, tumbling 13.6 percent after announcing it would shut all output from its Alunorte alumina refinery in Brazil.
"This is a very serious event for Norsk Hydro, potentially leading to severe losses," said a trader.
Grifols shares fell 6 percent after UBS analysts cut the stock to sell from neutral, saying competitive risks are rising.
"Fc Rn inhibitors, a new class of drug we expect to launch in 2021, threaten to replace up to 20 percent of Grifols sales," said analysts at the Swiss bank.
Tesco shares fell 8.5 percent after Britain's biggest retailer reported first-half profits which missed analysts' forecasts.
"Good like-for-like (sales), but weak bottom line points to margin destruction," said a trader.
Shares in French tech consultancy Altran jumped 9 percent to 8.12 euros, at the top of the STOXX after Kepler Cheuvreux analysts upgraded the stock to "buy" from "hold" with a price target of 10 euros.
Kepler analysts said they see no risk for liquidity, and that Altran's current share price values its global design and engineering company Aricent at roughly 0.
The stock, down 40 percent in the third quarter alone, is a popular short, amplifying any positive moves as short-sellers unwind their positions.
(Reporting by Helen Reid; Editing by Danilo Masoni and Andrew Heavens)