* Stocks rise in Europe and Asia, driven by merger activity
* Unilever falls as Kraft walks away; Deutsche Telekom up
* French bond yield gap over Germany hits widest since late 2012
* Dollar falls with U.S. yields lower; U.S. markets shut
* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh
By Nigel Stephenson
LONDON, Feb 20 (Reuters) - European stocks rose on Monday, with gains in telecoms and banks offsetting a big fall in Unilever, while uncertainty over political developments and the timing of a U.S. interest rate hike kept the dollar in check.
U.S. markets were closed for the Presidents Day holiday, and this restricted activity in Europe and Asia.
Unilever ULVR.L shares fell nearly 9 percent at one point after U.S. food company Kraft Heinz Co KHC.O withdrew on Sunday a proposal for a merger with its larger rival in the face of stiff resistance. Anglo-Dutch group's shares were last down 7.4 percent and were the day's biggest fallers.
Despite that slide, the pan-European STOXX 600 index .STOXX edged up 0.1 percent to just below a 14-month high touched last week.
A 3 percent gain in Deutsche Telekom DTEGn.DE helped push the index higher after a Reuters report that Japan's SoftBank 9984.T is prepared to give up control of Sprint S.N to Deutsche Telekom's T-Mobile US TMUS.O to clinch a merger of the two U.S. wireless carriers. Bank of Scotland RBS.L was the day's biggest gainer as shareholders welcomed a plan to scrap the proposed sale of its Williams & Glyn unit. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up 0.2 percent and back toward a 19-month peak reached last week.
Japan's Nikkei .N225 rose 0.1 percent while China's blue-chip CSI 300 index .CSI300 closed up 1.5 percent, its biggest gain in six months, after media reports on Friday that pension money may begin flowing into the market as soon as this week.
The dollar dipped 0.1 percent against a basket of major currencies .DXY after U.S. bond yields fell on Friday.
The euro EUR= rose 0.1 percent to $1.0623 while the yen fell 0.2 percent to 113.07 per dollar JPY= . Sterling GBP=D4 rose 0.5 percent to $1.2466.
The dollar hit its highest against the basket for more than a month last week after U.S. Federal Reserve Chair Janet Yellen said it would be unwise to delay raising interest rates before pulling back on uncertainty over President Donald Trump's policies, particularly on trade.
Minutes of the Fed's latest policy meeting on Wednesday will be examined for any clues to the timing of the next hike, and Fed officials speak at five events this week.
Cleveland Fed President Loreta Mester said in Singapore on Monday she would be comfortable raising rates if the economy maintained its current performance. focus in euro zone debt markets was on politics.
French 10-year government bond yields FR10YT=TWEB rose after an opinion poll published on Monday showed far-right candidate Marine Len Pen narrowing her centrist and centre-right rivals' lead in the final round of the presidential election in May. pushed the gap over benchmark German 10-year yields DE10YT=TWEB to 84 basis points, its widest since late 2012. It later pulled back to 72 bps.
Yields on safe-haven two-year German bonds DE2YT=TWEB hit a record low, at minus 0.85 percent.
"It all seems to be driven by the move in French bonds after a poll that showed Le Pen's improving fortunes in the second round of voting," Rabobank strategist Lyn Graham-Taylor said.
Among commodities, oil rose, although an increase in the number of U.S. drilling rigs dragged on the price. Brent crude LCOc1 rose 38 cents a barrel to $56.19.
Copper rose on supply worries after the world's second-biggest copper mine said it could not deliver promised shipment due to export permit problems. Three-month copper on the London Metal Exchange was up 0.7 percent at $6,004 a tonne,
Gold XAU= edged up 0.2 percent to $1,237 an ounce.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
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