By Medha Singh

(Reuters) - European stocks picked up their record rally on Thursday as the United States and Iran signalled a desire to avoid further conflict, while rising expectations that a Phase 1 U.S.-China trade deal will be signed next week also provided a lift.

A 1.3% gain for Germany's trade-sensitive DAX <.GDAXI> stood out among regional peers, also benefiting from data showing better-than-expected industrial output in November that dispelled any remaining worries about a recession in Europe's economic powerhouse.

"Confidence is recovering at a pace in Europe," said Steven Holden, CEO of Copley Fund Research.

"Investors are positioned for outsized returns almost across the board in terms of sectors and geographies as a pickup in economic growth combines with near certainty that the ECB won't raise interest rates for a long time yet."

The pan-regional STOXX 600 <.STOXX> hit an intraday record high in Thursday's session, rising for the third straight day.

The benchmark index saw its best annual percentage gain last year since the global financial crisis, but it had pulled back about as much as 2% from its record levels after last week's killing of a top Iranian general by the United States fanned fears of an all-out conflict in the region.

Mirroring strength in its U.S. peers, technology <.SX8P> index touched a near 19-year high and was among the best performing European sub-sectors.

Chipmaker Dialog Semiconductor (NASDAQ: DLGS) as well as anti-virus maker Avast (OTCBB: AVST) gained about 3% each after Bank of America Global Research raised its price objective for both the stocks.

It was a gloomy day for British retailers, however, as a spate of reports reflected a challenging Christmas period.

Marks & Spencer (NYSE: MKS) suffered its worst day in a year as it took a hit from waste in its food business and weak menswear and gift sales.

Britain's biggest retailer Tesco (NASDAQ: TSCO) ground out a 0.1% rise in UK sales, enough to beat its main rivals amid the toughest high street conditions in years. Its shares rose about 1%.

Whilst M&S has farther to go to catch-up online than Tesco, online rivals continue to take a toll on both, CityIndex analyst Ken Odeluga wrote in a note.

Brussels-listed Argenx (NASDAQ: ARGX) led gains on the STOXX 600 after the antibody therapeutics developer updated its 2020 pipeline and flagged positive results from a midstage study.

(Reporting by Medha Singh in Bengaluru; Editing by Frances Kerry)

Reuters