* Sterling slumps as May fires Brexit starting gun
* Deutsche Bank travails transfix investors
* Oil back up at $50
By Jamie McGeever
LONDON, Oct 3 (Reuters) - European shares got the new quarter off to a muted start on Monday as Deutsche Bank's travails weighed on banking stocks, while sterling slumped as Britain set a March deadline to start divorce proceedings from the European Union.
Germany's biggest lender is hoping to reach a settlement with the U.S. Justice Department before next month's presidential election for mis-selling mortgage-backed securities and faces a fine of up to $14 billion.
Deutsche shares won't trade in Germany on Monday because of a public holiday, but they will resume trading on the U.S. market later on Monday. A media report on Friday that Deutsche and the DOJ were close to agreeing a $5.4 billion settlement lifted the stock 6 percent, but that has not been confirmed.
British stocks were the standout performers in Europe, boosted by the pound's broad and deep weakness. The pound fell to a seven-week low against the dollar and a three-year low against the euro after British Prime Minister Theresa May effectively fired the starting gun on Brexit.
"The more the EU is likely to close access to the single market meaning that the UK appears to be setting the course towards a 'hard' Brexit. The drop in the value of the pound this morning reflects investors' concerns," Rabobank analysts wrote in a note.
Sterling fell around 1 percent against the dollar to a seven-week low of $1.2850, and a three-year low against the euro of 87.47 pence per euro.
This helped the FTSE 100 index of leading British shares rise almost 1 percent to 6,960 points. A weaker pound is a boon for British exporters, as well as the firms that earn the bulk of their earnings overseas and which dominate the FTSE.
May on Sunday told the ruling Conservative party's annual conference that she would trigger the process for Britain to leave the European Union by the end of March. Article 50 of the EU's Lisbon Treaty will give Britain a two-year period to clinch one of the most complex deals in Europe since World War Two.
Things were quieter elsewhere in the currency market, with the dollar steady at 101.38 yen, the euro also flat at $1.1232, and the dollar index up a slender 0.1 percent at 95.58.
The benchmark index of leading 300 European shares was flat at 1,350 points, having fallen around 0.5 percent at the open. Euro zone banking stocks were still in the red, however, down 0.3 percent
Figures on Monday showed that manufacturing activity in the euro zone picked up last month as demand increased from both within and outside the currency bloc, but the upturn remained uneven.
Germany and its neighbours did well but growth was far weaker than earlier in the year in Spain, Italy and Ireland, while manufacturing in France continued to decline.
Germany's DAX was closed for a holiday on Monday, meaning the focus for Deutsche Bank trading will be on its U.S.-listed shares. They jumped 14 percent on Friday, their best day in five years.
Deutsche has significant trading relationships with all of the world's largest finance houses and the International Monetary Fund (IMF) has identified it as a bigger potential risk to the wider financial system than any other global bank.
"If no deal (is) forthcoming then we would expect further selling pressure on Deutsche shares, which could eventually force the German authorities to step in and save its biggest bank," said Kathleen Brooks, analyst at City Index.
A rally in financial stocks led Wall Street to a firmer close on Friday. The Dow rose 0.91 percent, while the S&P 500 added 0.8 percent and the Nasdaq 0.81 percent.
U.S. futures pointed to a flat open on Wall Street.
Oil continued to rise on the back of OPEC's planned output cuts, with Brent crude futures hitting a six-week high and U.S. West Texas Intermediate a three-month high.
On Monday, the December Brent contract was up 1.2 percent at $50.75 a barrel, while U.S. crude rose 1 percent to $48.70.
Reporting by Jamie McGeever; Editing by Jon Boyle