UPDATE 2-European shares rise on M&A activity; Dialog Semi hits over 20-year highs

* Basic resources, tech, banks lead early gains

* Renesas agrees to buy Dialog Semi for $5.9 bln in cash

* BlackRock (NYSE: BLK ) underweight on European equities

* German industrial output flat; DAX retreats from record highs (Updates to close)

By Shreyashi Sanyal and Susan Mathew

Feb 8 (Reuters) - European shares rose on Monday, led by economically sensitive cyclical sectors, as sentiment was lifted by hopes of a quicker recovery and multi-billion dollar deals in the region.

The pan-European STOXX 600 .STOXX index rose 0.3% adding to gains of 3.5% in the previous week, in line with upbeat sentiment in global markets which saw Wall Street and an index of world shares .MIWD00000PUS hit all-time highs on stimulus hopes. MKTS/GLOB

Dialog Semiconductor DLGS.DE surged 16% to its highest in over two decades and topped the STOXX 600 after Japanese chipmaker Renesas Electronics Corp 6723.T agreed to buy the Frankfurt-listed chip designer for 4.9 billion euros ($5.89 billion) in cash. are many other European shares which had fallen out of favour for international investors and this (the deal) indicates that global investors particularly American, Japanese or Chinese investors are looking to invest in such names," said Chris Bailey, European strategist at Raymond (NS: RYMD ) James.

France's Veolia Environnement SA VIE.PA said it is launching an offer for all of waste and water management company Suez SA SEVI.PA , valuing it 11.3 billion euros ($13.59 billion) after dropping efforts to win the backing of the Suez board. French firms closed lower as new legal hurdles awaited the deal and amid a government warning of an increasingly hostile takeover battle. sectors including basic resources .SXPP , banks .SX7P and chemicals .SX4P rose between 0.8% and 2.2%, and were among top gainers on the main index. Technology shares .SX8P gained 1.5%.

The rollout of COVID-19 vaccines globally and increased M&A activity have helped reduce recent pessimism around European equities. The STOXX 600, however, has yet to reach pre-pandemic levels, about 5% away from 2020 highs.

"We are underweight European equities," said BlackRock strategists in a note.

"The market has relatively high exposure to financials pressured by low rates. It also faces structural growth challenges, even given potential for catch-up growth in a vaccine-led revival."

Data from Germany showed industrial output stagnated in December as lockdowns to contain the COVID-19 pandemic held back the export-oriented manufacturing sector in Europe's largest economy. main index .GDAXI closed flat, retreating from record highs at the open.

This comes after data last week showed orders for German-made goods fell more than expected in December, ending a seven-month streak of positive data. = 0.8315 euros)