LONDON/MILAN (Reuters) - European shares hovered around three-month highs on Tuesday as a sell-off in Spanish stocks eased and financials gained as Wall Street set fresh records.

The German share price index, DAX board, is seen at the stock exchange in Frankfurt, Germany, October 2, 2017. REUTERS/Staff/Remote

The pan-European STOXX 600 .STOXX index ended the session up 0.2 percent, with Germany closed for a holiday.

Spain's blue chip index .IBEX was flat in percentage terms as Madrid and Catalonia appeared to carefully weigh their next steps following Sunday's independence referendum, which the central government has declared illegal.

Catalonia’s secessionist leader called for international mediation while Spanish Prime Minister Mariano Rajoy said he was seeking a joint response to the crisis after meeting leaders of other political parties.

Catalonia-based banks Sabadell SABE.MC and Caixa CABK.MC traded up 0.1 percent and 1.6 percent respectively, having both been hit hard by concerns surrounding Spain's worst constitutional crisis in decades.

Sabadell and Caixa have the biggest exposure among Spanish banks to private sector loans in the wealthy Catalonia region, while Santander SAN.MC, up 0.2 pct, and Unicaja UNI.MC, up 1 percent, have the lowest.

Spanish utility Iberdrola IBE.MC fell 1.3 percent after JP Morgan downgraded the stock to neutral, saying political uncertainty in the euro zone country added to a list of headwinds, even though its Catalan assets are very small.

“We believe that the Catalan conflict adds uncertainty to the Spanish political situation, raising questions about the likely timing of elections ... regulatory decisions and the macro outlook,” JPMorgan analyst Javier Garrido said in a note.

Garrido also downgraded Red Electrica REE.MC to neutral, describing the firm as the "best utility proxy of political risk in Spain." Red Electrica shares fell 0.9 percent.

Growing political worries in Spain have weighed on the euro and pushed Madrid’s borrowing costs higher but their effect on European equities has remained confined to Spain so far.

“The euro and peripheral spreads have been hit by events in Spain, but European bourses have made another step toward resistance levels,” said Anthilia fund manager Giuseppe Sersale.

Only two months ago the IBEX was the best-performing country benchmark in Europe. Now Italy's FTSE MIB .FTMIB is the front-runner to end 2017 as top gainer, followed by Germany's DAX .GDAXI.

Financials and materials stocks also provided a sizeable boost to STOXX 600, offsetting weaker utilities.

Ferguson FERG.L was among the biggest STOXX gainers, up 4 percent after the British heating and plumbing products supplier reported a rise in trading profit and announced a share buyback plan.