* STOXX 600 rises 0.4%; up for third day running
* Italian stocks hit on concerns about country's debt
* Norsk Hydro shares rise on quarterly earnings beat
(Recasts, updates to close, adds quote)
By Aaron Saldanha
June 5 (Reuters) - European stock markets crept higher on Wednesday as defensive shares gained ground, but rising tensions between Italy and the European Commission over the country's debt dampened sentiment.
The caution in Europe made the region an outlier, as U.S. Federal Reserve Chairman Jerome Powell's accommodative comments late on Tuesday and weaker-than-expected U.S. data on Wednesday supported assets globally. MKTS/GLOB .N
The European Commission said Italy was in breach of EU fiscal rules due to its growing debt and this justified a disciplinary procedure, a position that firmly capped regional risk appetite. Deputy Prime Minister Luigi Di Maio complained that Brussels had treated Rome unfairly, but said he wanted constructive talks with the commission.
The STOXX 600 index .STOXX gained 0.4%, rising for a third straight day. Germany's DAX .GDAXI and London-traded stocks .FTSE edged up 0.1%, while Italian equities shed 0.4%. Europe's lenders .SX7P fell 0.5%, Milan-traded banks .FTIT8300 dropped 1.6%. UniCredit CRDI.MI slid 3.5%, while Banco BPM BAMI.MI declined 2.2%.
Redburn Financials Analyst Russell Quelch said the announcement of the commission's upcoming procedure "didn't come as a shock" but is sure to widen yield spreads between Italian and German bonds, "which matters for banks given their large sovereign bond portfolios."
"I would expect today's news to be another dent to the investment case for Italian banks, while higher spreads may ultimately be passed onto consumers through higher rates, the impact is immediately felt through capital as we saw in Q3 2018."
Berenberg trimmed its price target on Madrid-listed Caixabank CABK.MC , its shares fell 3.5%. .SX6P and real estate stocks .SX86P rose late in the day, especially after Di Maio's comments, tacking on 1.4% and 1.1%, respectively. Investors often take refuge in those sectors at times of market uncertainty.
Industrial goods and services stocks .SXNP rose 0.7%, aided by Dassault Aviation AVMD.PA surging 5% after Goldman Sachs (NYSE: GS ) upgraded the aviation firm's stock to "Buy", citing capital flexibility and an inexpensive valuation. resources firms .SXPP fell 1%, with losses partially cushioned by Norsk Hydro ASA's NHY.OL 0.9% rise. The Oslo-listed firm's quarterly underlying operating earnings beat expectations, although it said a cyber attack in March would cost it between NOK 300 million ($34.39 million) and NOK 350 million ($40.13 million). = 8.7226 Norwegian crowns)
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