UPDATE 1-European stocks surge as political nerves cool

European shares rallied to one month highs on Wednesday, as political developments in Italy and Britain eased investors' nerves, while hopes that Hong Kong would withdraw the extradition bill at the heart of months of protests helped Asia-focused companies.

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 announce that he would immediately push for a snap election. "Although the no-deal Brexit is far from removed as an option, things are a bit more tricky for Boris Johnson to force a no-deal agenda as he has lost (his) majority in parliament and (the) House of Commons," said Spreadex analyst Connor Campbell.

The pan-European STOXX 600 index rose 1.14% by 0750 GMT, hitting its highest level since Aug. 2 with Italian and German stocks outperforming. Italy's FTSE MIB index rallied 1.67% - touching a more than one-month high, after 5-Star members overwhelmingly backed a proposed coalition with the Democratic Party, opening the way for a new government to take office.

"The formation of a government in Italy is a relief, for the time being at least it has been done and dusted," Campbell said. The gains in markets were broad-based, but Britain's exporter-heavy FTSE 100 underperformed with a 0.81% 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, prompting the biggest increase in hiring in over a year. 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. Asia-exposed UK banks HSBC and Prudential boosted the benchmark STOXX 600 and helped drive a 1.78% rise in the banking sector, after a report that Hong Kong leader Carrie Lam may announce the formal withdrawal of the extradition bill.

The news also helped luxury stocks - LVMH Moet Hennessy Louis Vuitton SE, Swiss Jewelry company Compagnie Financiere Richemont SA and Gucci owner Kering SA - rise between 3.6% and 4.3%.

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