* European stocks reach highest since Oct. 5
* Stocks briefly stumble on report of delay to Xi-Trump summit
* Pound eases after best 1-day percentage gain since April 2017
* Oil prices dip on reported U.S.-China summit delay (Updates with latest stock and currency movements, reported delay to Xi-Trump summit)
By Tom Arnold
LONDON, March 14 (Reuters) - European shares rallied to more than five-month highs on Thursday, boosted by fading risks of a no-deal Brexit and overcoming fears about a possible delay in trade talks between the United States and China.
A pan-European equity index rose as high as 0.8 percent , its highest level since October after Britain’s parliament vote on Wednesday removed a key source of uncertainty by rejecting a no-deal Brexit.
European stocks had earlier stumbled after Bloomberg reported that a meeting between U.S. President Donald Trump and Chinese President Xi Jinping to end their trade war was more likely to take place in April at the earliest, later than expected.
The lingering trade spat between the two superpowers has been a cloud hanging over markets and there had been hopes Trump and Xi would hold a summit aimed at finding a breakthrough at the president’s Mar-a-Lago property in Florida this month.
The decision by Britain’s parliament had lifted British shares 0.8 percent.
The vote paves the way for a delay to Brexit beyond the current March 29 deadline which could lead to an EU divorce deal being agreed or even another referendum.
Goldman Sachs analysts told clients the probability of a no-deal Brexit had fallen to 5 percent from 10 percent after Wednesday vote. Despite the vote having no legal force, it carries considerable political force.
World shares trod water, staying off 4-1/2 month highs hit recently. Wall Street was set for a marginally softer open, futures showed.
“Global markets have had a good start to this year but people are now starting to focus on the real issues like will there be a (U.S.-China) trade deal, Brexit and the expectation that the Fed will raise rates possibly once more this year before maybe cutting rates,” said Peter Lowman, chief investment officer at Investment Quorum.
U.S. Federal Reserve has signalled that it is pressing pause on rate rises. Some players however reckon it could still raise interst rates one more time before calling time on its tightening campaign.
Lowman noted that despite China’s slowing growth — figures released on Thursday showed the Asian giant’s industrial output at 17-year lows and sluggish retail sales — markets have had an impressive rally this year, with the MSCI index climbing about 10 percent, spurred by the Fed’s change of heart.
But many remain sceptical about how much further the share rally can run.
“Before we conclude that this market still has decent legs, we’d like to see equity prices supported by stronger macro data, lifted by better earnings trends, and confirmed by stable-to-rising yields,” David Lafferty, chief market strategist at Natixis, told clients.
In currency markets, sterling slipped 0.9 percent after rallying in the wake of Wednesday’s vote by more than 1 percent to $1.3380, the highest since June 2018.
The retreat comes as lawmakers prepare to vote again later in the day to delay Brexit until at least the end of June.
But analysts risks have not been eliminated with parliament still needing to find a way forward and all 27 EU nations needing to agree an extension on Brexit.
“There is gradual optimism being priced in and barring something highly unlikely, the possibility of an actual no-deal is not zero but less than 5 percent,” said Tim Graf, head of macro strategy at State Street Global Advisors.
But he added: “There is always the chance the EU won’t grant an extension if they are just going to be trying to push this deal through ... that’s where the caution comes in.”
Elsewhere, the Australian dollar reacted most to the report about a delayed meeting between China and the United States, falling to its lowest in three days at $0.7049, down 0.6 percent , on the day.
Concern remains that any escalation in the trade conflict will hit hard export-oriented economies such as Australia, whose biggest trading partner is China.
The yuan was relatively stable in the offshore market. It lost half a percent at 6.7353, not far from a one-month low of 6.7372.
News of the potential delayed meeting between the U.S. and Chinese leaders pushed oil prices into reverse, with Brent stumbling 0.1 percent to $67.47.
Additional reporting by Swati Pandey in Sydney, Tom Finn and Abhinav Ramnarayan in London; Editing by Alison Williams