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LONDON, Oct 3 (Reuters) - Italian stocks turned from a drag into a boost for European markets on Wednesday as signs the government would target a lower budget deficit quelled investors' fears of a damaging showdown with the European Commission.
Italian bank stocks jumped 3.1 percent after government bond yields fell back and the spread to Bunds narrowed thanks to reports the government was targeting a lower budget deficit in 2020 and 2021.
Still in the thrall of developments on the Italian front, the leading euro zone stocks index and the pan-European STOXX 600 both rose 0.3 percent by 0720 GMT, with bank stocks the best-performing, up 1.1 percent.
Italy's FTSE MIB outperformed, up 1.4 percent.
Italy's biggest banks Unicredit and Intesa Sanpaolo were among the top gainers, up 2.6 percent each, while Mediobanca, UBI Banca, and Banco BPM also rose as much as 5 percent.
Outside of politics, Oslo-listed aluminium firm Norsk Hydro was the biggest faller, down 7.3 percent after announcing it would shut all output from its Alunorte alumina refinery in Brazil.
Tesco shares fell 5.5 percent after the UK's biggest retailer reported first-half profits which missed analysts' forecasts.
"Good like-for-like, but weak bottom line points to margin destruction," said a trader.
Shares in French tech consultancy Altran jumped 11 percent to the top of the STOXX, with traders citing an upgrade from broker Kepler Cheuvreux.
The stock, down 40 percent in the third quarter alone, is highly shorted, amplifying any positive moves as short sellers unwind their positions. (Reporting by Helen Reid; editing by Danilo Masoni)