FRANKFURT (Reuters) - Shares in German utility RWE (>> RWE) rallied on Monday on renewed investor hopes for a deal for its Innogy (>> Innogy SE) unit as well as on expectations of a less stringent climate policy following the failure of coalition talks in Germany.

RWE is looking at ways to cut its 16.8-billion euro (£14.9 billion) stake in retail business Innogy (>> Innogy SE) and one option involves a deal with Italy's Enel (>> Enel), Reuters reported at the weekend.

Despite having no immediate need for cash, RWE has recently held talks with Enel, Europe's largest utility by market value, according to a person familiar with the matter.

RWE shares were up 3.1 percent on Germany's DAX market <.GDAXI> , which was off 0.34 percent at 0945 GMT. Investor sentiment was also helped by expectations that the collapse of talks to form a government in Germany could lead to a more lenient outcome for RWE.

The Greens, which had been expected to be part of a new German government, have been pushing for the closure of coal-burning power plants. That threat has weighed on RWE's share price this month.

"The plant closures will likely be delayed," one trader said.

Analysts from Goldman Sachs said in a note on Monday that they see large potential for RWE's price due to factors such as compensation payments for early plant closures, an expected increase in power prices and an M&A related valuation for Innogy.

A possible deal with Enel is the latest scenario for Innogy after sources earlier this year said RWE and France's Engie (>> Engie) had studied a share swap under which RWE would trade part or all of its stake in Innogy for a minority stake in Engie.

(Reporting by Arno Schuetze; editing by Jason Neely)

Stocks treated in this article : Engie, Endesa, Enel, Iberdrola, RWE, Innogy SE