* Italian stocks rally on hopes of avoiding snap elections

* Dublin jumps on smoother Brexit hopes, FTSE lags

* Beijing auto stimulus lifts auto stocks (Recasts, changes comment, updates to close)

By Agamoni Ghosh

Aug 27 (Reuters) - European shares rose comfortably on Tuesday led by Italian stocks on hopes of an arrangement to form a new coalition government in Rome, while Beijing's pledge to boost car sales triggered gains in auto-makers exposed to Chinese markets.

Milan's blue-chip index ended 1.5% higher, far outperforming its regional peers as the 5-Star Movement and the opposition Democratic Party (PD) appeared on the verge of a deal to form a new government at the centre.

While differences persisted between the two traditionally antagonistic parties over cabinet posts, there remained a high possibility that Giuseppe Conte could return as Prime Minister.

"Italy has an edge over its peers today because there is hope that the coalition will be formed and hence the country can avoid a snap election," said Connor Campbell, financial analyst at Spreadex in London.

If talks however, fail, the euro zone's third-largest economy could be staring at months of political uncertainty at a time when it is facing economic stagnation, a mounting fiscal deficit and potential conflict with the European Union over its budget.

The pan-European STOXX 600 index ended 0.6% higher, reversing losses from the morning led by defensive utilities and auto stocks.

News that China's State Council was considering relaxing and removing restrictions on auto purchases came as a welcome move for both car-makers as well as the broader markets that is reeling from the damaging effects of the protracted trade spat.

"That's (China stimulus) promising of course, but any hoped-for benefit won't offset damage already done to Europe's export-underpinned economy by trade disputes and other long-standing pressures," said Ken Odeluga, markets analyst at City Index.

The final estimate of Germany's GDP data for the second-quarter confirmed on Tuesday that Europe's largest economy contracted by 0.1% and that weak exports were the main reason for the shrinkage.

Worries that the trade dispute may tip major economies into recession has put European equities on pace to end August nearly 4% lower, but hopes that central banks may step in to provide stimulus has limit losses.

London's FTSE 100 lagged its peers, down 0.1% as the British pound rose to a near one-month high after opposition parties vowed to try and pass a law to prevent a no-deal Brexit at the end of October.

Dublin's ISEQ index, typically sensitive to Brexit news, jumped on the developments, closing 1.5% higher.

In a rather quiet day for company news, Swedish leisure products supplier Dometic slid 7% to land at the bottom of the STOXX 600 on the latest downward trend in U.S. leisure vehicle shipments. (Reporting by Agamoni Ghosh and Medha Singh in Bengaluru; Editing by Angus MacSwan)