By Agamoni Ghosh
May 27 (Reuters) - Confirmation of merger talks between Fiat Chrysler and Renault to create the world's third-largest car maker thrust European shares higher on Monday, while investors assessed the results of the EU Parliament elections.
The pan-European STOXX 600 .STOXX was up 0.4% by 0815 GMT with allmajor indices in the green but trading volumes were thin with UK, US markets closed for market holidays.
Auto stocks.SXAPclimbed 1.6%, outperforming all other sectors, as Italian-American carmaker Fiat Chrysler FCHA.MI confirmed it had made a "transformative merger" proposal to French peer Renault RENA.PA in a deal which would create the world's third-biggest carmaker and help address some of the weaknesses in both companies.
Shares of both companies were at top of the STOXX 600, up more than 10% each.
The merger talks come at a time when car makers are under pressure to consolidate to counter falling sales across leading markets, as well as to deal with tightening emissions regulations amid expensive new technologies related to automation and electrification taking center stage.
"For Fiat, which has never invested in 'green' (technologies), it can be a way to make a tie-up with someone which already has an electric mass market presence," said a trader at a European bank.
"For Renault the deal can be even more compelling because Fiat Chrysler has access to the NAFTA market where their (Renault's) presence is practically zero."
Meanwhile, Peugeot maker PSA's PEUP.PA shares fell on the merger news, a developmentsome analysts put down to the fact that Fiat had chosen to seek a merger with Renault rather than PSA.
Most decliners on the index made nominal moves but Danish facility services provider ISS A/S ISS.CO fell 7%, dragging down the Copenhagen blue chips index .OMXC20 after news that a contract with Novartis NOVN.S was unlikely to be extended.
Investors also focused on the European Parliament elections where a two-party "grand coalition" of the conservative European People's Party (EPP) and the Socialists (S&D) lost their combined majority as a result of a surge in support for liberals, the Greens and eurosceptic nationalists.
Policymaking will likely become more complex and require broader cross-party agreements and discipline with eurosceptic and anti-establishment groups estimated to have increased their weight, said analysts from Deutsche Bank research in a note.
In Asia, stocks inched up but remained near four-month lows on Monday amid concerns about U.S.-China tensions with U.S. President Donald Trump saying he was "not yet ready" to make a deal with China.
The trade war escalation this month has hit the pan-European STOXX 600, which is looking at its first monthly decline for 2019 since a sell-off at the end of last year that knocked 15% off the index.
(Reporting by Agamoni Ghosh and Danilo Masoni Editing by Mark Heinrich)
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