* H&M among top gainers on STOXX after profits beatforecasts
* Retail outperforms all European sectors at quarter's end
* UK PM May's Brexit deal defeated for the third time
(Updates to close)March 29 (Reuters) - European shares rose on Friday butsettled slightly below session highs after lawmakers rejected UKPrime Minister Theresa May's deal to exit the European Union forthe third time, increasing the possibility of a 'no deal' orprolonged Brexit.The pan-European STOXX 600 index closed up 0.6percent, having earlier hit session highs on encouraging signalsfrom U.S.-China trade talks.
The benchmark clocked its best quarter in four years,although gains in March were lower than in the previous twomonths as a bruising trade war which contributed to a slowdownin global growth and the chaos around Brexit hit sentiment.All sub-sectors within the pan-regional benchmark ended thequarter higher, led by the retail sector's 20 percentsurge over the last three months.France's CAC 40 outperformed with a 1 percent gainon the day, while Germany's trade-sensitive Dax rose0.9 percent and Britain's exporter-heavy FTSE 100 was up0.6 percent.Stocks in Dublin - a barometer for Brexit sentiment- closed 1.5 percent higher, posting their best day in almosttwo months.Britain now has until April 12 to convince the other 27 EUcapitals that it has an alternative path out of the impasse orsee itself cast out of the bloc with no deal on post-Brexit tieswith its largest trading ally.Many eurosceptics prefer the 'no deal' option, butbusinesses say it would cause huge damage not only to theworld's fifth-biggest economy, but also to that of neighbouringIreland. Swedish-based apparel retailer H&M was among the
top gainers on the STOXX 600, up 9.5 percent after reporting asmaller-than-expected drop in quarterly pre-tax profit. The European labour market is robust, and gains in personalincome are boosting retail sales, said Bert Colijn, an economistat ING.Europe's retail sector logged its best quarter since thesecond quarter of 2003 and while banks posted the secondsmallest sectoral gain, they broke a five quarter losing run.
Stocks also got a boost from reports that U.S. TreasurySecretary Steven Mnuchin had a productive working dinner inBeijing as U.S.-China trade talks ended. Any move towards a deal would be positive for Europeanmarkets, Colijn said, as the slowdown in China and the U.S. hashad an impact on exports from Europe.
Shares in Galapagos surged 22 percent after theBelgian drugmaker said it had seen positive results from severaltrials of a rheumatoid arthritis drug. Business software firm SAP and oil and gas majorBP PLC were also among the biggest gainers.
Nordea Bank shed more than 10 percent, whileSwedbank dropped 7.6 percent. Both stocks wentex-dividend on Friday, while New York's financial regulator hasreportedly has sent letters to both as part of amoney-laundering investigation.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Retailers top performer in Europe in Q1 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Medha Singh, Agamoni Ghosh and Susan Mathew inBengaluru; editing by Larry King and Kirsten Donovan)
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