BORGO EGNAZIA, Italy (Reuters) - When French President Emmanuel Macron arrived at the luxury Borgo Egnazia Italian resort on Thursday for the annual Group of Seven G7 leaders summit, he could have been forgiven for seeming a little downcast.

But after dissolving parliament and plunging France into a rocky political period just weeks before hosting the Olympic Games, he was all smiles and relaxed as arch-conservative Italian Prime Minister Giorgia Meloni greeted him.

Yet his dramatic decision, taken after the far-right Rassemblement National (RN) trounced his ruling party in EU parliamentary elections, has dealt a gut punch to some of his closest allies and weakened him across the bloc, diplomats say.

They add that he may struggle to exert as much influence in his diplomatic dealings for now, especially as his centrist bloc in the European parliament will be smaller, making it harder for him to influence talks for future EU posts.

For much of the last seven years in power, Macron has billed himself as the leader and kingmaker in Europe, while trying to assert France's role in crises from Ukraine to the Middle East, despite Paris' ultimate influence being limited.

His style has grated some, his initiative exasperated others, but he has at the very least been able to weigh on key issues and project France's image overseas.

"There will be no more leadership left in Europe. Macron was the last Mohican to try to play this role," said a senior European diplomat in Paris.

The diplomat hoped that Macron would somehow manage to muster a coalition of French traditional political parties in the two-round June 30/July 7 legislative election.

After the first day of the summit, Macron remained defiant, saying he did not believe current events would affect his decisions on issues such as Ukraine and that other world leaders knew he would be in charge until the end of his mandate in 2027.

"I don't think so," Macron said, when asked whether he had been weakened. "My interlocutors are all democratically-elected and they all said "it's (the dissolution) courageous."

A source aware of the discussions said Macron and U.S. President Joe Biden had spoken to each other about their respective domestic political issues.

PRACTICAL REALITIES

In the immediate term, there are practical realities. Diplomats, officials and civil servants at the foreign and defence ministries are in limbo, three sources said.

Ministers are running daily affairs and civil servants know that they may have new faces from political parties that have not governed before and hold radically different positions to their predecessors.

"We are just doing the essential," said one senior diplomat. "If it's the RN, we will have to test it and see."

Key dossiers such as Macron's proposal to create a coalition of European military instructors to Ukraine may be put on hold given such a sensitive idea would be a tough sell during an election campaign.

Ukrainian officials are hopeful that executive decisions will still be made in the short-term, but countries that may have followed France will wait to see the outcome.

It may also dampen France's position to push for anything stronger for Ukraine at the upcoming NATO summit in Washington in July, diplomats say.

"Yes, we're worried, but we need to make people understand that Ukraine needs to be at the heart of the election campaign because this is as much a domestic issue as an international one that concerns them," said a Ukrainian official.

Ukraine's worries over what may happen after the July 7 vote centre on the two possible blocs that could well come out on top. While sharply different, the RN and the far-left France Unbowed party have both long been accused of pandering to Moscow.

Macron accused them both at a press conference on Wednesday of showing ambiguity towards Russia.

Even if the RN did score a majority in the French parliament, Macron would remain president for three more years and still be in charge of defence and foreign policy.

But he would lose control over the domestic agenda, including economic policy, security, immigration and finances, which would in turn impact other policies, such as aid to Ukraine, as he would need parliament's backing to finance any support as part of France's budget in the autumn.

As part of its 10-year security guarantee pact with Ukraine agreed in March, Paris said it would provide up to 3 billion euros ($3.2 billion) in military aid to Ukraine in 2024, but beyond that it would be unclear.

"I wouldn't underestimate the danger of Macron raising the stakes internationally with some sort of initiative," said a southern European diplomat.

(Reporting by John Irish; Editing by Alex Richardson and Deepa Babington)

By John Irish