MILAN- A rally in European shares ran out of steam on Thursday amid persistent uncertainty over Britain's exit from the European Union, while hopes of a compromise over Rome's contested budget helped Italian stocks outperform.

The pan-European STOXX 600 benchmark index fell 0.2 percent by 0932 GMT following a strong two-day rally. UK stocks eased after Prime Minister Theresa May survived a leadership challenge but appeared weakened as a mutiny by over a third of her lawmakers indicated parliament was heading towards deadlock over Brexit.

May was set to ask European leaders for help at a summit later on Thursday but investors expected no significant developments.

"It doesn't seem likely that we'll see much evidence of any progress before Christmas, if at all before January," said CMC Markets analyst Michael Hewson.

The German DAX index, which had been supported this week by a return of optimism that Washington and Beijing could reach a deal over trade, also turned lower, down 0.3 percent, while France's CAC fell 0.2 percent

"While the UK government faces challenges of its own, the economic environment in Europe is no less challenging given the recent unrest in Paris," CMC's Hewson added.

Some disappointing earnings also weighed.

Metro fell 11 percent after the German wholesaler predicted a fall in profits due to its struggling Russia business, while GAM plummeted 28 percent after the Swiss asset manager posted a big loss and omitted dividend. 

However, Italian stocks outperformed, with the country's banks index up 1.7 percent after the government cut its deficit goal for 2019 with EU Commissioner Pierre Moscovici saying the bloc was having constructive talks with Rome.

Shares in Intesa Sanpaolo, Italy's largest retail bank, were among the leading gainers in Europe, up 1.6 percent, while German lenders Deutsche Bank and Commerzbank extended their rally on M&A chatter.

The broader euro zone bank index  rose around 1 percent to its highest level in a week.

Elsewhere, Plastic Omnium advanced 6.1 percent after an upbeat update from the French plastic processing group, while G4S soared 10 percent after the British security company said it was looking at a separation of its cash solutions business. 

Spanish builder Sacyrand Salini Impregilo of Italy came under heavy pressure after an arbitration tribunal ordered the Panama canal construction consortium they are part of to pay back nearly $848 million.

Sacyr and Salini shares both lost 10 percent.

(Reporting by Danilo Masoni Editing by Gareth Jones) ((Danilo.Masoni@TR.com; +39-02-66129734; Reuters Messaging: danilo.masoni.thomsonreuters.com@reuters.net; On Twitter https://twitter.com/damasoni))