* STOXX pulls back from 3-1/2 month high
* Italian stocks set for worst month in two years
* DB says use "macro weakness" to buy Italy's Eni
* M&S up after update, UK banks in focus on M&A report(Adds details, updates prices)
By Danilo Masoni
MILAN, May 23 (Reuters) - European shares pulled back onWednesday as a drop in crude prices stopped a long run in energystocks and uncertainty over the creation of ananti-establishment government in Italy pressured the euro.
The pan-European STOXX 600 index fell as much asone percent, pulling back from a 3-1/2 month high hit onTuesday, while export-oriented Germany's DAX, whichnormally finds support in currency weakness, declined 1.3percent. Adding to the gloom was data showing euro zone economicgrowth slowed much more sharply than expected in May.
Top faller among national indexes was Italy's FTSE MIB, down 1.8 percent to its lowest level since earlyApril, as a sell-off in the country's government bond resumed.
"Italy remains centre stage with its politicaldevelopments," said Alessandro Balsotti, portfolio manager atJCI Capital. "The minister and economy minister choices and theactual creation of a government rather than new elections willbe the drivers for investors in Italian assets in coming weeks."
An attempt by a little-known professor to become thecountry's next prime minister hit a hurdle following allegationsthat he had inflated his academic credentials.
The FTSE MIB has fallen more than five percent so far in Mayand was on track for its worst month in nearly two years.
However some investors saw bargain hunting opportunities.
Deutsche Bank on Wednesday lifted its target on oil majorEni saying political worries that have hit Italianmarkets this month could offer an opportunity to buy shares inthe country's largest listed firm.
"Use the Italian macro weakness to buy," analysts at theGerman bank said.
The energy index, the biggest sectoral gainer so farthis year in Europe, fell 2.5 percent as the possibility ofhigher OPEC output sent oil prices lower.
Shares in oil majors Total, BP and RoyalDutch Shell fell between 2 and 2.7 percent, while Enideclined 1.9 percent
Elsewhere, Marks & Spencer rose 3.6 percent after itreported full-year results.
While the retailer's update included a second straightdecline in annual profit and a 321 million pounds charge for astore closure programme, Morgan Stanley said the lack of anoutlook or dividend cut could trigger a significant shortsqueeze in its shares.
UK banks were in focus after the Financial Times reportedthat Barclays was exploring a potential merger withrival banks, including Standard Chartered. Sourcesclose to the bank told Reuters that Barclays was not exploring apotential merger.
Barclays shares fell 0.6 percent, while Standard Charteredrose 1.6 percent.(Reporting by Danilo Masoni, Editing by William Maclean)
