UPDATE 2-Relief for European stocks as political tensions ease

* Italian shares rally as PM unveils cabinet
* Opponents of 'no-deal' Brexit defeat PM Johnson
* FTSE 100 under-performs as pound halts slide
* Hong Kong leader withdraws extradition bill

(Updates to close)
By Sruthi Shankar
Sept 4 (Reuters) - A rally in Italian shares driven by the
formation of a new government lifted European stocks on
Wednesday, with investors also taking heart from an easing of
political tensions in Britain and Hong Kong.
The pan-European STOXX 600 index .STOXX rose 0.89% at the
close, with Milan-listed shares soundly outpacing their European
peers after Italian Prime Minister Giuseppe Conte unveiled his
new cabinet. Investors cheered an unlikely coalition uniting rival
political parties the 5-Star Movement and the Democratic Party,
heading off the risk of an early election and prolonged
political instability.
"This is a very clear interpretation by the market that the
new government is seen as positive, at least when it comes to
approach to the budget policies and interaction with the
European Commission," said Marco Valli, Unicredit's head of
macro research.
"You have a government that is expected to stick to a
pro-European stance, which is important because that is needed
for financial stability even if we have a deterioration in the
global environment."
Italy's FTSE MIB index .FTMIB rallied about 1.6%, touching
a more than one-month high, while the banking index .FTIT8300
jumped 1.75%.
On the other side of the English Channel, British lawmakers
defeated Boris Johnson in parliament on Tuesday in a bid to
prevent him from taking Britain out of the EU without a divorce
agreement, prompting the prime minister to demand a snap
election. Britain's exporter-heavy FTSE 100 .FTSE underperformed
with a 0.59% rise, weighed down by a steadying of the pound on
Tuesday's events at Westminster.
Adding to the upbeat mood was data that showed activity in
China's services sector expanded at the fastest pace in three
months in August as new orders rose. Surveys showed euro zone business growth was a touch faster
than expected last month but remained in the doldrums as the
bloc's dominant service industry only partially offset a
slowdown in manufacturing. Investors will now look ahead to a European Central Bank
meeting next week that is widely expected to lower interest
rates as policymakers seek to head off a slowdown caused by the
protracted U.S.-China trade war.
Trade-sensitive sectors such as miners, automakers and oil
and gas companies led the charge on the main STOXX 600 index.
Asia-exposed UK banks HSBC HSBA.L and Prudential PRU.L
boosted the main index and helped drive a 1.24% rise in the
banking sector .SX7P , after Hong Kong leader Carrie Lam
withdrew an extradition bill that triggered months of often
violent protests so the Chinese-ruled city. The news also helped luxury stocks - LVMH Moet Hennessy
Louis Vuitton SE LVMH.PA , Swiss Jewelry company Compagnie
Financiere Richemont SA CFR.S and Gucci owner Kering SA
PRTP.PA - rise between 2.4% and 3.6%.