UPDATE 2-European shares end higher on U.S.-China talks, earnings optimism

* U.S.-China trade talks calm investor nerves

* Basic resources sector best weekly performer

* Bank sector among worst weekly performers

* Decision on Italy's credit rating awaited

(Updates to close)

By Sruthi Shankar and Ambar Warrick

May 8 (Reuters) - European shares closed higher on Friday, clocking weekly gains as signs of improving U.S.-China relations provided a fresh dose of optimism for investors counting on the easing of lockdowns to spark a recovery in global growth.

The pan-European STOXX 600 .STOXX closed up 0.9%, with dialogue between U.S. and Chinese officials over their phase-1 trade deal soothing investor about a renewed trade spat. stocks .SXAP , which rely heavily on China as a market and a production hub, led gains for the day, rising nearly 3%.

Strong earnings also helped, with ING Groep NV INGA.AS , the largest Dutch bank, adding 3.6% as it posted first-quarter pretax earnings that beat market expectations. SIEGn.DE rose 4.8% after the German industrial company announced cost-cutting plans to deal with the impact of the pandemic following an 18% drop in industrial profit in the second quarter. in Frankfurt .GDAXI and Paris .FCHI rose 1.4% and 1.1%, respectively. London markets were closed for a public holiday.

The STOXX 600 added about 1.1% for the week, as a series of better-than-expected earnings helped distract investors from a continued stream of weak economic readings due to the coronavirus.

Basic resources stocks .SXPP were the best weekly performers among the European subindexes, as optimism over the gradual reopening of economies and robust Chinese trade data pushed up commodity prices.

On the other hand, bank stocks .SX7P lagged most of their peers for the week, as growing discord between Germany and the European Central Bank cast doubts over certain ECB asset purchasing programmes.

Italy for instance, depends heavily on one of the programmes to keep borrowing costs down , and with the country set for its worst post-war recession, its lenders face a surge in bankruptcies.

The country's bank-heavy index .FTMIB lost 1.5% for the week, as markets await decisions from rating agencies DBRS and Moody's on Italy's sovereign debt.

"As we do not expect a downgrade by Moody's, the likelihood is that we will see a solid start on Monday," UniCredit analysts wrote in a note.

"Nevertheless, investor concerns about a possible cut to below investment grade by one rating agency are likely to persist in the coming quarter."

German military equipment and auto parts group Rheinmetall RHMG.DE ended largely flat after it forecast significantly lower sales and profits this year due to the pandemic. insurer Storebrand ASA STB.OL shed 2.9% after Kepler Cheuvreux downgraded the stock to "reduce".