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UPDATE 2-European stocks edge lower, Lufthansa drags after profit warning

* Lufthansa plunges after profit warning, weighs on airlines

* Investors await upcoming FOMC meeting on Wed

* Deutsche Bank gains on report it plans to set up a "bad bank" (Updates to close)

By Susan Mathew and Medha Singh

June 17 (Reuters) - European stock markets closed marginally lower on Monday with a profit warning from Germany's Lufthansa hitting airline stocks, while markets globally awaited clues from the U.S. Federal Reserve on its policy direction.

The pan-European STOXX 600 index finished 0.1% lower. France's CAC 40 was led higher by luxury stocks, while IT company Indra Sistemas' 7.1% slip took Spain's IBEX 35 0.7% lower.

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At the U.S. Federal Reserve policy meeting starting Tuesday, investors on balance think an interest rate cut is unlikely while many back a shift towards one in July.

A swing in money market pricing towards up-to-three rate cuts by the Fed this year have been at the heart of a recovery for stock markets this month after their worst falls in months in May.

"The market seemed to be in a kind of cautious mode because of the Fed meeting. A lot has been priced in," said Craig Erlam, senior market analyst at Oanda.

"There is a much higher chance that the Fed intentionally or unintentionally pours cold water over the expectations," he said.

The European travel and leisure sector underperformed other major European sectors as Lufthansa plunged 11.6% and kept Germany's DAX pressured.

The group lowered its profit outlook for the full year 2019, citing price competition from low cost rivals in Europe.

"Lufthansa signaling a weak outlook is hitting all these bigger carriers and that's definitely one negative element this morning," said Chris Beauchamp, chief market analyst at IG.

International Consolidated Airlines (IAG) fell 2.2%, while budget airlines EasyJet and Ryanair Holdings slipped more than 4% each.

Spain's Indra Sistemas fell after a media report said is to buy up to 75% of ITP Aero from Rolls Royce for about 1 billion euros ($1.12 billion).

Contributing to CAC 40's gains, French luxury stocks Kering and LVMH rose more than 1%. Peer Chanel reported higher annual sales and profits on Monday.

Banks had a mixed day.

HSBC rose 0.9% and was among the biggest boosts to STOXX 600 after it announced plans to expand its branch network by around a quarter as it opened a new location in Apple Inc's home town of Cupertino, California.

Deutsche Bank, which has been cutting back and reorganising for months, gained 1.4% after the Financial Times reported that the German lender is planning to create a "bad bank" that would house or sell assets valued at up to 50 billion euros.

Meanwhile, Nordea Bank, the Nordic region's biggest lender, slipped 1.7%. Its Danish headquarters was searched on June 12 by Denmark's state prosecutor in relation to an ongoing money-laundering investigation into the bank, a Nordea spokesman told Reuters. (Reporting by Amy Caren Daniel, Medha Singh and Susan Mathew in Bengaluru; editing by Patrick Graham and Toby Chopra)