By Nikhil Sharma and Purvi Agarwal

(Reuters) - German stocks ended Monday higher in Europe after conservatives led by Friedrich Merz won the national election with promises of pro-growth policies to boost an ailing economy.

The domestically-focussed German mid-cap index jumped 1.5%, while the blue-chip index pared some earlier gains, but still ended the day 0.6% higher. Small caps were up 0.9%.

"The outcome that we got is very close to a best case scenario from a macro perspective. This should bring a business-minded government with a reform-oriented pro-growth agenda and some needed political stability to the EU," Maximilian Kunkel, chief investment officer for Germany at UBS, said.

Kunkel added that a reform-minded government could lead to a comeback in confidence, driving greater investments and consumption.

Financial stocks led gains, while defence companies pared early gains.

Merz was set to become Germany's next chancellor, though his party faces tricky coalition negotiations after the far-right Alternative for Germany (AfD) surged to a historic second place in a fractured vote.

Some uncertainty lingered over potential reforms to the debt brake - a mechanism limits budget deficits to 0.35% of gross domestic product - as the AfD and Left party jointly secured seats required to block changes.

Germany's 10-year bond yield, the benchmark for the wider euro zone, was up 1.8 basis points at 2.48%.

Local German bourses outperformed the pan-European STOXX 600 index that lost 0.1%. Miners tracking lower metal prices and financial stocks led losses with declines of more than 1.2% each.

Industrials on the STOXX fell 1% with electrical equipment maker Schneider Electric tumbling 6.9% to the bottom of the index.

Utilities, along with food and beverages led gains amongst the STOXX sub-sectors.

Away from Germany, stocks in Portugal gained 1.6%, while ones in Switzerland hit a record high in the session before closing marginally lower.

BlackRock Investment Institute upgraded European equities to "neutral" from "underweight", supported by potentially de-escalating geo-political conflicts, falling energy prices and monetary policy easing.

Across the Atlantic, U.S. stocks also saw declines with the benchmark S&P 500 and the tech-heavy Nasdaq selling off before results from AI bellwether Nvidia later in the week.

Weighing on the tech index, Prosus slid 8.8%, after the Dutch tech company agreed to buy Just Eat Takeaway.com for 4.1 billion euros ($4.3 billion).

The latter jumped over 54%, recording its best day on record.

B&M fell 2.1% after the British discount retailer cut its profit forecast, and announcement the retirement of top boss Alex Russo.

(Reporting by Nikhil Sharma and Purvi Agarwal; Editing by Eileen Soreng, Subhranshu Sahu and Andrew Heavens)