European stocks dip; Commerz down on Dresdner talk

(The UK stock market is closed for a bank holiday on Monday. There will be no FTSE stock market report. Normal markets coverage will resume on Tuesday)

By Sitaraman Shankar

LONDON, Aug 25 (Reuters) - European shares fell early on Monday, giving up some gains from the previous session, with volumes hit by a UK stock market holiday and Commerzbank down on talk it is trying to seal a deal for Dresdner.

At 0837 GMT, the FTSEurofirst 300 index of top European shares was down 0.2 percent at 1,173.52 points after notching up a 1.8 percent gain on Friday.

Stocks moved in a narrow range in dull trade, with the day's high at 1,175.80 and the low at 1,170.29.

Commerzbank fell 1.1 percent and Dresdner's owner Allianz gained 1.4 percent after sources close to the matter told Reuters that Commerzbank was racing to buy Dresdner by the end of this week.

"Commerzbank needs to intergrate (Dresdner) and experience shows that this can be rather difficult," said a trader, who said the sale would be a relief for Allianz.

The oil and gas sector, as measured by the DJ Stoxx European oil and gas index , was among the worst performers of the sectoral indexes with a 0.5 percent fall.

Total fell 1.2 percent and Royal Dutch Shell lost 0.3 percent, with oil trading slightly higher but having shown a 5.4 percent fall on Friday, its steepest since 2004.

Falling oil prices are bad for heavily weighted energy stocks but, in the longer term, positive for the broader market as they reduce input costs and take the edge off inflation fears.

"The clearly positive sign is that the raw material oil and food prices are on the decline and the inflation outlook is more favourable," said Tuomas Komulainen, Helsinki-based strategist at Danske Market Securities.

"This should lead to lower inflation figures in both the euro zone and the United States in August and September and the situation is then easier for the ECB and the Fed," he said.

"On the negative side is the euro zone economy slowing more than expected, but overall things are slightly more positive for equities."

U.S. Federal Reserve Chairman Ben Bernanke on Friday said that the stronger dollar and lower oil prices, along with the weak economy, should curb inflation, in a hint that interest rates would stay on hold, though he warned the inflation outlook was "highly uncertain".

Across Europe, Germany's DAX .GDAXI was down 0.2 percent and France's CAC .FCHI was down 0.6 percent.

TWO MONTHS OUT OF TEN?

The FTSEurofirst 300 is down 0.6 percent so far this year, and a strong finish to August would take it into positive territory for only the second month in the last ten.

Shares have been battered by a global credit crisis stemming from a collapse in risky U.S. mortgages, which has slowed the economy and threatens to hit corporate profits further in the second half.

Underlining the difficulties faced by banks in particular, Denmark's central bank and a vehicle of the Danish financial sector are to buy to out Roskilde because no other offers, foreign or domestic, had been received for the bank.

Shares in Roskilde were suspended.

Airlines were in focus after Lufthansa formally announced its interest in acquiring a stake on offer in Austrian Airlines . Lufthansa fell 1 percent and Austrian jumped nearly 7 percent. Stock in another possible buyer, Air France-KLM , fell 1.3 percent.

Analysts said that the weak European economy would take its toll on earnings, but added that stocks had been battered so much -- the FTSEurofirst is down more than 22 percent this year -- that it would make little difference to share prices.

"We will probably have more earnings disappointments in Q3 and Q4, especially compared to bottom-up analysts' forecasts," said Komulainen, who added that cyclicals would be worst hit by Europe's slowing economy.

"But they are not a major factor any more as prices already discount them," he said.

With little scheduled on the corporate front, investors will train their sights on U.S. home sales data due at 1400 GMT.

(Additional reporting by Kirsti Knolle in Frankfurt; editing by Rory Channing)