UPDATE 2-European shares flat, macro gloom saps early Fed boost

* STOXX 600 flat, best month since

* Italy in technical recession

* Deutsche Bank , Commerzbank fall on merger report

* Shell strong after results (Adds closing prices)

By Danilo Masoni and Julien Ponthus

MILAN/LONDON, Jan 31 (Reuters) - European shares ended a choppy trading session flat on Thursday as disappointing economic data, including a technical recession in Italy, gradually sapped an early boost provided by a dovish tone from the U.S. Federal Reserve.

The STOXX 600 .STOXX ended the day up 0.04 percent but rose a strong 6.1 percent in January, its best monthly performance since October 2015, as global markets recovered from a turbulent 2018.

Economic indicators showed, however, that concerns for the European economy were warranted. German retail fell at the fastest rate in 11 years, British car production posted its biggest drop since 2009 and euro zone growth was the slowest in four years.

A Bloomberg report that Deutsche Bank DBKGn.DE was expecting a government-brokered merger with rival Commerzbank CBKG.DE if efforts to restructure fell short of targets also hit the banking sector. The German lenders fell 4 percent and 6.7 percent respectively.

"It is a double whammy for the eurozone, Italy has slipped into recession and there is increased chatter of a Deutsche Bank and Commerzbank merger", commented CMC (NS: CMC ) analyst David Madden.

Milan's FTSE MIB .FTMIB slipped 0.2 percent while Frankfurt's DAX .GDAXI also dipped 0.1 percent.

Higher crude prices and a strong update from Shell helped to support the market with the oil index rising 1.8 percent, the biggest sectoral gainer in Europe.

Royal Dutch Shell RDSa.L jumped almost 4 percent as annual profits rose by more than a third to $21.4 billion, the highest since 2014. for investors to give credit where credit is due," wrote Bernstein analyst Clint Oswald, saying Shell remained one of his top picks for this year.

"We think 2019 will be a repeat, guidance will be maintained, and 2020 targets are on track," he added.

There were also strong results from Diageo DGE.L , the world's largest spirits company, which rose 4.6 percent after posting higher half-year sales, helped by strength in India and China. was also a lot of activity in the telecoms sector, with the Dutch telecoms company KPN KPN.AS up 6.2 percent on speculation of a bid by Brookfield Asset Management BAMa.TO .

Telecom Italia TLIT.MI jumped about 5 percent after the U.S. hedge fund Elliott raised its stake, escalating a power battle over the group with top shareholder Vivendi VIV.PA .

The Swiss watchmaker Swatch UHR.S tumbled 6.1 percent after posting lower-than-expected results amid a downturn in Asia and France, while a disappointing update sent Germany's Software SOWGn.DE down 4.8 percent to the bottom of the STOXX.

Analysts have been steadily cutting profit expectations for European firms. According to Refinitiv IBES, fourth-quarter earnings for the STOXX 600 are expected to have grown less than 4 percent, versus more than 10 percent expected last month.