* Sterling slumps as PM May fires Brexit starting gun
* Deutsche Bank travails keep investors on edge
* Oil back up at $50
By Jamie McGeever
LONDON, Oct 3 (Reuters) - Sterling slumped to a three-year low against the euro on Monday as Britain set a March deadline to start divorce proceedings from the European Union, while worries over Deutsche Bank and Europe's banking sector kept share prices in check.
British stocks were the standout performers in Europe, lifted to an 18-month high by the pound's broad and deep weakness and figures showing the fastest rise in UK manufacturing output in more than two years.
Apart from Britain's FTSE, however, Europe failed to follow Asian stocks' solid start to the quarter, and U.S. futures pointed to a flat open on Wall Street.
While factory data from across the euro zone supported European shares, banking jitters weighed heavily.
On top of Deutsche's well-documented travails, Dutch lender ING Groep said it would slash 7,000 jobs and Portugal's central bank governor said the country's banks were in dire need of capital hikes.
Oil's push above $50 a barrel for the first time since mid-August on the back of last week's OPEC agreement to curb output caught investors' eye. But the main focus was on sterling's adverse reaction to the latest twist in the Brexit saga.
"Sterling has weakened this morning as a hard Brexit becomes more likely. Long term, if the UK does follow through with a hard Brexit, sterling has the potential to come under further pressure given the probable stalling of foreign direct investment," said Shilen Shah, bond strategist at Investec Wealth & Investment.
British Prime Minister Theresa May on Sunday effectively fired the starting gun on Brexit, while new finance minister Phillip Hammond signalled that fiscal policy will be looser than predecessor George Osborne had pledged.
Sterling fell around 1 percent against the dollar to a seven-week low of $1.2850 and within a cent of a fresh 31-year low. It also hit a three-year low against the euro of 87.47 pence per euro.
This helped the FTSE 100 index of leading British shares rise more than 1 percent to 6,986 points. A weaker pound is a boon for British exporters, as well as the firms that earn the bulk of their earnings overseas and which dominate the FTSE.
Things were quieter elsewhere in the currency market, with the dollar steady at 101.38 yen, the euro flat at $1.1232, and the dollar index unchanged at 95.49.
Figures on Monday showed that manufacturing activity in the euro zone picked up last month as demand increased from both within and outside the currency bloc, but the upturn remained uneven.
Germany and its neighbours did well but growth was far weaker than earlier in the year in Spain, Italy and Ireland, while manufacturing in France continued to decline.
Europe's benchmark index of leading 300 shares was up 0.1 percent at 1,352 points, having fallen around 0.5 percent at the open. Euro zone banking stocks were still in the red, however, down 0.4 percent
The DAX was closed for a holiday on Monday, meaning the focus for Deutsche Bank trading will be on its U.S.-listed shares. They jumped 14 percent on Friday, their best day in five years.
Germany's biggest lender is hoping to reach a settlement with the U.S. Justice Department before next month's presidential election for mis-selling mortgage-backed securities. It faces a fine of up to $14 billion.
Deutsche has significant trading relationships with all of the world's largest finance houses. The International Monetary Fund has identified it as a bigger potential risk to the wider financial system than any other global bank.
A media report on Friday that Deutsche and the Justice Department were close to agreeing a $5.4 billion settlement lifted the stock 6 percent, but that has not been confirmed.
"If no deal (is) forthcoming then we would expect further selling pressure on Deutsche shares, which could eventually force the German authorities to step in and save its biggest bank," said Kathleen Brooks, analyst at City Index.
Oil continued to rise on the back of OPEC's planned output cuts, with Brent crude futures hitting a six-week high and U.S. West Texas Intermediate a three-month high.
On Monday, the December Brent contract was up 1.2 percent at $50.75 a barrel, while U.S. crude rose 1 percent to $48.70.
Editing by Hugh Lawson