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        * 
      Fed decision due at 1800 GMT
    

        * 
      Rate hike fears knock real estate sector 3.8% down 
    

        * 
      UK inflation surprise pressures BoE to raise rates again
    

        * 
      STOXX 600 adds 0.2%, FTSE 100 gains 0.4%
    

  
 (Updates prices, details; adds comment)
    By Sruthi Shankar and Bansari Mayur Kamdar
       March 22 (Reuters) - 
    European stocks edged higher on Wednesday, extending gains
for a third day, as investors awaited a crucial monetary policy
decision from the Federal Reserve amid turmoil in the banking
sector.
  
    The pan-European STOXX 600 index  .STOXX  inched 0.2% up
after a two-day bounce.
    The index is up 2.5% so far this week, helped by banking
stocks, following a series of measures to stabilise the sector
following the collapse of three U.S. banks and trouble at lender
Credit Suisse. 
    "There is still a bit of a relief rally going on off the
back of finding a solution to the Credit Suisse situation and
some positive sounds coming out of the U.S.," said Jonas
Goltermann, deputy chief markets economist at Capital Economics.
        The European Central Bank's top brass 
    said
     they were watching for signs of banking stress from the
ongoing financial turmoil but a full-blown crisis is unlikely
for now.
  
    European banks  .SX7P  slipped 0.2% after jumping nearly 5%
in the past two sessions, lifted by UBS'  UBSG.S  state-backed
takeover of Credit Suisse and coordinated actions by central
banks to boost liquidity.
    The Fed is expected to raise interest rates 25 basis points
later on Wednesday, as a political storm brews over the U.S.
central bank's oversight of recently collapsed Silicon Valley
Bank.
    The Fed decision is due at 1800 GMT and Chair Jerome Powell
will speak at a news conference half an hour later.
    "Markets are very much aware that the Fed is stuck between a
rock and a hard place," said Han Tan, chief market analyst at
Exinity Group.
    "If the dot plot points to a terminal rate that's higher
than the 5.1% that FOMC officials forecast back in December,
such hawkish clues may prompt another risk-off wave across the
equity market."
    Traders had priced in a 50 bps rate hike from the Fed
earlier this month, but turbulence in the banking system and
financial markets pushed them to drastically reduce their bets. 
    Money market traders are currently pricing in nearly 90%
odds for a 25 bps hike, according to CME Group's Fedwatch tool.
They also see rates peaking at 4.95% by May.
        Europe's rate-sensitive 
    real estate sector
      .SX86P  dropped to a five-month low.
  
        Shares of Aroundtown  AT1.DE  fell 10%, leading losses
on STOXX 600, on concerns the Luxembourg-based real estate
company may cancel its dividend, according to two traders.
        Earlier in the day, 
    data showed
     British inflation unexpectedly rose to 10.4% in February,
which is likely to prompt the Bank of England to raise interest
rates on Thursday. 
  
        UK's FTSE 100 index  .FTSE , however, erased early
losses and added 0.4% supported by consumer staples.  .L 
  
    Marks and Spencer Group  MKS.L  rose 4.5% after Citi
upgraded the British retailer's stock to "buy," saying its
savings plan will help margin recovery.

 (Reporting by Sruthi Shankar and Bansari Mayur Kamdar in
Bengaluru; Editing by Sherry Jacob-Phillips, Sonia Cheema and
Richard Chang)
 ((sruthi.shankar@thomsonreuters.com; within U.S. +1 646 223
8780; outside U.S. +91 80 6182 2787;))