* U.S. tax cut plan boosts stocks
* STOXX 600 up 0.4 pct to highest since mid-July
* Banks up 2 percent, Banco Sabadell recovers from Catalan slump
* Alstom surges after striking rail merger deal (Adds closing prices, quotes)
By Helen Reid and Julien Ponthus
LONDON, Sept 27 (Reuters) - Banks led European stocks to a 10-week high on Wednesday as a tax overhaul plan backed by President Donald Trump fuelled hope in a revival of the “Trumpflation” trade, a bet on rising rates, inflation and securities prices in the United States and beyond.
The pan-European STOXX 600, boosted by a falling euro, gained 0.4 percent to hit its highest level since July 20.
The rise in the common currency had weighed on the index this summer, denting earnings expectations.
“Global stock markets have taken a major step out their recent malaise today,” Joshua Mahony, a market analyst at IG, wrote in a note to clients.
“While the prospect of lower taxes promise a bounty for stocks, it is worth noting that Trump has yet to deliver on any major policies,” he cautioned.
Banks touched a six-week high, up 2 percent, as the prospect of fiscal stimulus in the U.S. resurfaced.
Spain’s Banco Sabadell, which had suffered in the wake of tensions over the Catalan referendum, posted the best performance of the STOXX 600 with a 6.9 percent jump after the central government said police would take control of voting booths in Catalonia to thwart it.
“We see immediate concerns around independence as overdone and as a manageable medium term risk to bank earnings,” Barclays said in a research note, affirming its overweight rating on the stock. Caixabank also made a robust comeback, with a 4.4 percent increase.
Madrid’s IBEX was by far the best performer among major European bourses with a 1.8 percent rise.
Mergers and acquisitions also drove the market with Alstom shares hitting their highest level in more than six years after the French industrial group struck a deal to merge rail operations with Germany’s Siemens.
Alstom rose 4.6 percent while Siemens gained 1.2 percent.
Analysts combed through the fine print of the deal, saying it made strategic sense in a consolidating rail industry globally with competition heating up, but pointing to potential problems in cost-cutting plans.
“Siemens-Alstom targets annual synergies of 470 million euros after four years, which looks overly ambitious,” wrote Deutsche Bank analysts, adding politicians in France and Germany were likely to resist layoffs.
The deal comes as French President Emmanuel Macron is calling for further European integration and could be the first of a fresh wave of cross-border, politically-backed transactions in the European Union.
France and Italy are expected to announce later on Wednesday an agreement to study the merger of French military shipyards DCNS with Italian shipbuilder Fincantieri.
Broker downgrades drove the worst performers. Swedish retailer ICA sank 4.6 percent after SEB cut it to “sell”, and Electrolux fell 4 percent after Goldman Sachs cut it from its pan-European “buy” list.
Reporting by Helen Reid; editing by Danilo Masoni/Mark Heinrich