September 2, 2019 / 9:16 AM / a year ago

UPDATE 2-Defensive buying drives European stocks higher; FTSE outperforms

* STOXX 600 closes at highest since Sept 2

* London shares outperform as pound takes a hit

* Euro zone manufacturing contracted for seventh month (Updates to close)

By Sruthi Shankar

Sept 2 (Reuters) - European stocks closed higher in thin trading on Monday, with investors favouring defensive sectors as the United States and China imposed more tariffs, while a slide in the pound helped Britain's FTSE 100 outperform.

The pan-European STOXX 600 closed up 0.3%, starting September on a positive note after global trade disputes and recession worries drove the benchmark down 1.6% in August.

After a tumultuous month, equity investors largely shrugged off the latest escalation in the trade spat as Washington began imposing 15% tariffs on a variety of Chinese goods on Sunday and Beijing reciprocated with new duties on U.S. crude oil.

London shares jumped 1%, outpacing their European peers, as the internationally focused stocks got a boost from a a slump in sterling on fresh Brexit worries.

On the main STOXX index, defensive sectors such as food and beverage, healthcare and utilities - which tend to be favoured during times of economic uncertainty - led the gainers.

In the latest evidence of trade war taking a toll on global growth, a series of business surveys from China to Europe showed factory activity was largely in decline in August.

An ongoing decline in export-reliant Germany meant factory activity in the euro zone contracted for a seventh month in August, bolstering expectations the European Central Bank will ease monetary policy next week.

"The data hasn't changed views much. You're left with the fact that a lot of negatives about the trade war has been discounted in the recent days," Rabobank's Philip Marey said.

"There are some hopes that will be talks between the two parties and the U.S. holiday is having an impact as well. Investors are waiting for a direction from U.S. markets."

U.S. President Donald Trump said both sides will still meet for talks later this month.

Trade reliant sectors like technology stocks and autos lagged, and commodity-linked stocks turned to losses after initially leading gains in the region on a surge in iron ore prices.

Trade-sensitive German shares ended slightly higher, led by gains in exchange operator Deutsche Boerse , while a price target hike by Goldman Sachs on renewable energy company RWE drove its shares up 3.7%.

Easing political worries helped Italy's FTSE MIB gain 0.6% after Prime Minister Giuseppe Conte said on Sunday he expected to settle talks over a new government by Wednesday, as the 5-Star Movement and Democratic Party (PD) worked out cabinet posts and a common agenda.

In corporate news, German real estate firm Aroundtown SA turned 3.2% lower after initially hitting a record high. Rival TLG Immobilien said it was evaluating a potential merger with Aroundtown buying a nearly 10% stake in the company for about 1.02 billion euros. TLG's shares also fell 3.5%

British pharma company AstraZeneca Plc jumped 2.9% to an all-time high on positive late-stage study results and a target price hike by Deutsche Bank.

Reporting by Sruthi Shankar in Bengaluru; Editing by Alison Williams

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