* STOXX down 0.2 percent, stays near to 11 month high
* Monte Paschi tumbles to lowest since listing in 1999
* Spanish lender down sharply after EU court ruling
* M&A activity buoys Actelion, Mediaset, Dormakaba
* Volkswagen rises after new dieselgate settlement (Live coverage of European markets now available on cpurl://apps.cp./cms/?pageId=livemarkets) Adds details, updates prices)
By Danilo Masoni
MILAN, Dec 21 (Reuters) - European shares inched lower on Wednesday but stayed close to their highest in over 11 months as merger and acquisition activity propped up the market, while Monte dei Paschi slumped to fresh record lows on worries over its rescue.
The pan-European STOXX index fell 0.2 percent after ending the previous session at its highest since Jan. 4. The euro zone blue-chip index < .STOXX50>, which closed in positive territory for the year on Tuesday, slipped by the same amount.
Monte dei Paschi was suspended for excessive volatility several times and fell as much as 19 percent to its lowest level since it listed in 1999.
The ailing Italian lender, which said it could run out of cash in four months, is seeking to raise 5 billion euros on the market by the end of the year in a last ditch attempt to avert state aid.
Investors are sceptical the bank, the country's third largest, would succeed in raising the funds on the market but also expressed doubts over whether the 20 billion euros that the government seeks to borrow to help the banking sector will be enough.
"Will 20 billion be enough to solve Italy's banking problem? It's hard to say after so many failures. Certainly state aid .. would be better than forcing the banking system to patch up the weaker outliers," Anthilia Capital fund manager Giuseppe Sersale said.
Italy's bank index was down 0.6 percent.
Spanish lenders also fell sharply with Banco Popular , down 4.4 percent, leading losses, after the European Court of Justice overturned a Spanish court ruling that limited the banks' liabilities for so-called floor clauses in mortgage contracts. It asked them to repay customers over the whole life of the loan.
Actelion rose 4.5 after sources told Reuters late on Tuesday that Sanofi's takeover talks with the Swiss drugmaker were progressing. Shares in Actelion fell in the previous session on worries a deal would not materialise soon.
Mediaset rose as much as 8 percent to a 16-month high as it extended a rally after France's Vivendi said it raised its stake in the Italian broadcaster to above 25 percent. Its shares pared some gains and were up 1.4 percent.
M&A news also buoyed Switzerland's Dormakaba. Shares in the security group rose 5.6 percent, leading gainers on the STOXX after the company agreed to buy mechanical security businesses from Stanley Black & Decker for $725 million.
Volswagen rose 1.5 percent after agreeing to a $1 billion settlement to fix or buy back another 80,000 polluting diesel vehicles sold in the U.S..
DZ Bank analyst Michael Punzet welcomed the deal but affirmed his sell rating as uncertainty remains high.
"Once again VW issued positive headlines but didn't deliver most of the important details. For example, details on compensation payments to US customers will be disclosed later, maybe on Thursday. Therefore the financial impact of the agreement cannot be finally calculated, he said.
Volswagen shares remain below the price they were before the so-called "Dieselgate" scandal broke more than a year ago. (Reporting by Danilo Masoni; Editing by Keith Weir)