* STOXX 600 rises 0.4%; up for third day running
* Italian stocks hit on concerns about country's debt
* Norsk Hydro shares rise on quarterly earnings beat (Recasts, updates to close, adds quote)
By Aaron Saldanha
June 5 (Reuters) - European stock markets crept higher on Wednesday as defensive shares gained ground, but rising tensions between Italy and the European Commission over the country's debt dampened sentiment.
The caution in Europe made the region an outlier, as U.S. Federal Reserve Chairman Jerome Powell's accommodative comments late on Tuesday and weaker-than-expected U.S. data on Wednesday supported assets globally.
The European Commission said Italy was in breach of EU fiscal rules due to its growing debt and this justified a disciplinary procedure, a position that firmly capped regional risk appetite.
Italian Deputy Prime Minister Luigi Di Maio complained that Brussels had treated Rome unfairly, but said he wanted constructive talks with the commission.
The STOXX 600 index gained 0.4%, rising for a third straight day. Germany's DAX and London-traded stocks edged up 0.1%, while Italian equities shed 0.4%.
While Europe's lenders fell 0.5%, Milan-traded banks dropped 1.6%. UniCredit slid 3.5%, while Banco BPM declined 2.2%.
Redburn Financials Analyst Russell Quelch said the announcement of the commission's upcoming procedure "didn't come as a shock" but is sure to widen yield spreads between Italian and German bonds, "which matters for banks given their large sovereign bond portfolios."
"I would expect today's news to be another dent to the investment case for Italian banks, while higher spreads may ultimately be passed onto consumers through higher rates, the impact is immediately felt through capital as we saw in Q3 2018."
Berenberg trimmed its price target on Madrid-listed Caixabank, its shares fell 3.5%.
Utilities and real estate stocks rose late in the day, especially after Di Maio's comments, tacking on 1.4% and 1.1%, respectively. Investors often take refuge in those sectors at times of market uncertainty.
Industrial goods and services stocks rose 0.7%, aided by Dassault Aviation surging 5% after Goldman Sachs upgraded the aviation firm's stock to "Buy", citing capital flexibility and an inexpensive valuation.
Basic resources firms fell 1%, with losses partially cushioned by Norsk Hydro ASA's 0.9% rise. The Oslo-listed firm's quarterly underlying operating earnings beat expectations, although it said a cyber attack in March would cost it between NOK 300 million ($34.39 million) and NOK 350 million ($40.13 million).
($1 = 8.7226 Norwegian crowns) (Reporting by Aaron Saldanha in Bengaluru and Helen Reid in London Editing by Mark Heinrich)