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GLOBAL MARKETS-Europe feels the heat as political temperatures rise

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* European stocks, euro fall for fourth straight day

* Periphery euro zone bond yields rise

* Gold touches 1-month high

* Oil drifts lower

By Marc Jones

LONDON, May 30 European shares fell for a fourth day running on Tuesday and the euro was battling to avoid a similar fate, as the prospect of early Italian elections and Greece's ongoing struggles nudged up the political temperature gauge again.

The region's banks also came under pressure as Deutsche Bank cut the sector to 'underweight', while sterling rebounded having been knocked recently by signs that next week's UK election is set to be closer than originally expected.

All this drove the traditional safe-haven assets of gold and the Japanese yen higher and briefly pushed yields low-risk German government bonds to their lowest in more than a month.

Low inflation readings out of Spain and Germany, as well as European Central Bank chief Mario Draghi's commitment to continued stimulus in a speech on Monday, helped keep the euro subdued at $1.116.

At the heart of the moves, however, were signs that elections in Italy may now come as early as September, after the 5-Star Movement became the fourth big party to back a switch to a proportional electoral system.

Italian shares remained flat having slumped 2 percent on Monday and southern euro zone bonds were also pushed into the red again.

"We always knew Italy was going to come back into the market's sights but I think people thought we would have a longer stay of execution," said Rabobank currency strategist Jane Foley.

"It does seem like the market will have to face worries about elections and populism again over the summer. That of course is a drag for the euro."

In spite of the weakness seen in the last couple of weeks, the pan-European STOXX 600 index is still set to end May in positive territory and near a 2-year high.

It will also be the index's fourth straight month of gains. Investors however are reshuffling their portfolios as they seek fresh catalysts following a surprisingly strong earnings season and hot streak of euro zone macro economic data.

European equity strategists at Deutsche Bank downgraded banks to 'underweight' saying the sector's valuations - which have soared around 80 percent over the last year - were no longer "compelling".

They also cut tech firms to neutral and JP Morgan's analysts did the same to carmakers. At the same time Deutsche upgraded construction and energy stocks to 'overweight' while JP Morgan raised UK stocks to neutral saying they were at the cheapest-ever levels on price price-to-book basis relative to region.

"We think UK is becoming interesting in the regional allocation again," JPMorgan's strategists, led by Mislav Matejka, said in a note to clients.

"(The) UK is a defensive market with high dividend yield. It should perform better in the backdrop of potential softening in activity indicators, lower inflation prints and continued range-bound bond yields."

GOLD SHINES

Greece's debt problems also continued to simmer after it failed to reach a deal on its next installment of its bailout programme earlier this month.

Greek Finance Minister Euclid Tsakalotos on Tuesday dismissed reports in Germany's Bild newspaper, that the country could opt out of receiving the new tranche if it does not receive clearer debt relief terms.

The dollar index, under pressure over the past fortnight from concerns over the Trump administration's difficulties, gained around 0.2 percent in early trade in Europe.

In commodities, oil prices retreated around 40 cents a barrel, as concerns lingered about whether the extension of output cuts by OPEC and other producing countries will be enough to support prices.

Global benchmark Brent fell 0.8 percent to $51.90 and U.S. crude futures slipped about 0.4 percent to $49.60 a barrel.

Gold meanwhile rose to a one-month high of $1,270 an ounce before it ran out of steam. It has risen almost five percent over the last three weeks as stock markets and other risk plays favoured by traders have stuttered.

Risk surrounding the closeness of Britain's upcoming elections, the prospect of early elections in Italy and worries over Greek debt were supporting gold, said Jeffrey Halley, a senior market analyst at OANDA.

"The picture will get more muddy as the week goes on as we have a lot of data from around the world coming in," he said.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Patrick Graham in London and Nithin ThomasPrasad in Bengaluru; Editing by Richard Lough)

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