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* FTSEurofirst 300 up 0.7 percent
* Investors eye win for pro-reform party in Italy
* Italian banks lead gainers
* Deutsche Borse leaps on M&A report
* Elan rallies on $6.6 mln bid approach
By David Brett
LONDON, Feb 25 (Reuters) - Italian banks were among the top risers in Europe around midday on Monday as investors started to bet on a centre-left victory a closely-fought general election, seen as crucial to efforts to dig the euro zone out of crisis.
Opinion polls have suggested the pro-reform, centre-left Democratic Party of Pierluigi Bersani could secure a narrow victory in the recession-hit country, the euro zone's third-largest economy.
"Everybody is expecting that the left wing will be the winner of the election. It is not yet sure but it is in the price," said Oliver Roth, head trader at Close Brothers Seydler.
Italy's benchmark index rallied 1.8 percent led by banks such as Unicredit and Intesa SanPaolo as concerns of a victory for former prime minister Silvio Berlusconi eased.
One note of caution, however, were signs of a surge in protest votes that added to the risk of an unstable outcome and Italy's broader economic problems remain a huge challenge for the incoming administration, whatever its makeup.
"In the short term ... only a hung Parliament ... has the potential to rock the boat at this stage," said Nicola Marinelli, fund manager at Glendevon King.
"Longer term is more challenging, because the Italian (economic) problems that (former prime minister) Mario Monti had just started to tackle are all still there."
Marinelli said he remained happy to hold some Italian assets in the short-term, although he favoured corporate credit more than government bonds.
Demand for Italy's state debt held firm at a sale on Monday with the state's borrowing costs only slightly up from a month earlier and lower than rates on secondary markets.
The more buoyant mood in Italy fed through to the broader market where the FTSEurofirst 300 rose 8.21 points, 0.5 percent, to 1,173.79 by 1138 GMT.
Sentiment was also helped by more signs from the Federal Reserve late last week that soothed concerns it may withdraw economic stimulus sooner than previously expected. A broader outlook for continuing ultra-easy policy in both Japan and the United States continues to underpin markets.
And Britain's FTSE 100 also rallied 0.7 percent, shrugging off the loss of the first of the country's triple-A credit ratings late on Friday, which knocked both sterling and UK government bond prices.
Berenberg Bank said the downgrade is likely to mean slightly looser monetary and fiscal policy, which usually benefits equities.
The cut weighed on the value of the pound, but that again would be another boost for equities on London's blue chip index, around 70 percent of which derive their earnings from outside the UK.
The euro zone's blue chip index climbed 1.9 percent to around 2,679, extending a bounce off near three-month lows hit last Thursday. One technical analyst said gains should continue if the index manages to close above resistance at 2,675.
Germany's Dax, meanwhile, powered 2.3 percent ahead, led by a 10.3 percent gain for Deutsche Boerse AG after a Bloomberg report that it had been approached by CME Group Inc., the world's largest futures exchange, to consider beginning talks on a merger.
Irish drugmaker Elan Corporation gained 8.9 percent after Investment firm Royalty Pharma made a $6.6 billion bid approach to the firm.
On the down side, drug maker Reckitt Benckiser fell 4.1 percent after the U.S. Food and Drug Administration (FDA) approved generic production of its heroin addiction treatment Suboxone, rejecting a company petition on packaging.
British education and media group Pearson was the top faller, down 5.6 percent after said it expects this year's earnings to be flat on 2012.