UPDATE 2-Trade talk progress sets Europe up for strongest week in three months

Reports of progress in U.S.-China trade negotiations drove a strong rally in European stocks on Friday, boosting mining, autos, and banking shares as investors hoped for a resolution to the tariff war between the world's two biggest economies. The trade-sensitive German index jumped as much as 2 percent while the STOXX 600 rallied 1.3 percent, accelerating gains after a tepid open following weak China inflation data.

China's state news agency Xinhua reported China and the U.S. reached a consensus in principle on some key issues during trade talks in Beijing during which they discussed topics including technology transfers and intellectual property protection. Combined with Chinese President Xi Jinping saying talks will continue in Washington next week, that gave the market another leg up after U.S. Treasury Secretary Mnuchin said talks had been "productive".

Mining stocks jumped 2 percent to a four-month high and China-sensitive autos stocks rose 1.3 percent, a big reversal from early losses after weak European car sales data. "Clients are underweight, upside is the path of least resistance," a senior sales trader said.

The strong gains erased the market's pessimism after figures showed China's factory-gate inflation slowed for a seventh straight month. Despite the hit to European markets after weak U.S. retail sales data on Thursday, the STOXX 600 was set for its strongest week since mid-November.

"Year-to-date Europe has been doing surprisingly well in terms of market performance, but the data is still looking pretty bad," Martin Moeller, portfolio manager at UBP in Geneva, said. Car shares had fallen earlier after weak European car sales data. Investors are also looking to a Feb. 17 deadline for the U.S. Commerce Secretary to release a report about whether European car imports pose a national security threat.

BANK BOOST Bank stocks were also top movers.

Euro zone bank stocks rallied sharply after ECB board member Benoit Coeure said a new round of TLTRO (targeted long-term refinancing operations) is "possible". The index climbed 3.1 percent, set for its biggest one-day gain in a month.

Investors have been hoping for a new round of TLTROs - cheap multi-year loans to banks - to boost ailing euro zone lenders, particularly in Italy. Italian banks rose 2.8 percent to a two-month high after the comments. In corporate news, some strong results helped the STOXX up.

French media giant Vivendi climbed 6 percent after reporting strong results for its Universal Music Group arm, and confirming it would soon select financial advisors to sell a stake of up to 50 percent in UMG. "UMG has continued to deliver strong organic revenue growth with paid streaming accelerating quarter-on-quarter throughout 2018," UBS analysts said.

Vivendi also announced its top stakeholder, billionaire Vincent Bollore, would further withdraw from the company's management. Bollore, another of the billionaire's companies, climbed 6.4 percent. German insurer Allianz rose 2.2 percent after it reported results in line with expectations.

"We think the combination of operational strength and capital management discipline shines through once again," wrote KBW analysts. Telecom Italia was a top gainer, up 6.7 percent after a source said Italian state lender CDP has authorisation to increase its stake in the firm to 10 percent within the next 12 months.

Eutelsat meanwhile sank 6.4 percent, the biggest faller on the STOXX, after its first half results. A trader said the company's CEO talked down the possibility of consolidation in the industry. Swedish defence firm Saab climbed 6 percent after its fourth-quarter earnings beat expectations and it forecast better margins and sales in 2019.

M&A also moved some shares. German internet portal Scout24 surged up 12 percent to the top of the STOXX after it welcomed a higher offer from a private equity consortium of Hellman & Friedman and Blackstone.

(Reporting by Helen Reid; Editing by Alison Williams)