European shares snap 3-day rally as banks sink

* FTSEurofirst 300 down 0.7 pct, Euro STOXX 50 down 0.9 pct

* Banks fall after S&P downgrades U.S., European banks

* Institutionals seen buying futures to increase exposure

By Blaise Robinson

PARIS, Nov 30 (Reuters) - European stocks fell early on Wednesday, snapping a sharp three-session rally, as Standard & Poor's downgrade of a number of European and U.S. banks prompted investors to dump shares of financial institutions.

At 0921 GMT, the FTSEurofirst 300 index of top European shares was down 0.7 percent at 940.89 points, after gaining 6.5 percent since a low on Friday.

S&P cut its credit ratings by one notch on 15 major banks, mostly from Europe and the United States, as the result of a sweeping overhaul of its ratings criteria. The move could increase already-soaring funding costs for a number of banks.

"Anglo-American banks are the most hit by S&P's changes in ratings criteria, but the impact remains muted if you look at the banks' credit default swaps because the downgrades had been expected," said Sebastien Barthelemi, credit analyst at Louis Capital Markets, in Paris.

Barclays, HSBC and UBS, all downgraded by S&P, were down 1.3-2.2 percent, while other European banks also retreated, with Societe Generale down 2.4 percent and Deutsche Bank down 1.6 percent.

"The market remains headline-driven, but we're starting to see big institutional investors coming back, mostly through equity futures to minimise the risks," said David Thebault, head of quantitative sales trading, at Global Equities.

"There is a growing feeling that progress is being made towards more integration in Europe, and that the European Central Bank has plenty of ammunitions left, so you don't want to be caught on the wrong side when it starts using it."

Euro zone ministers agreed to boost their rescue fund late on Tuesday, but couldn't say by how much, and may turn to the International Monetary Fund for additional help after a big jump in Italy's borrowing costs at an auction on Tuesday fuelled fears over the euro zone debt crisis.

Around Europe, UK's FTSE 100 index was down 0.5 percent, Germany's DAX index down 0.9 percent, and France's CAC 40 down 0.9 percent.

The euro zone's blue-chip Euro STOXX 50 index was down 0.9 percent at 2,214.61 points, falling back below the 50 percent retracement of the index's sharp rally in October. It has been stuck in a range since late July, bouncing between 2,000 points and 2,500 points.

"With these range-bound indexes, long-only strategies are dead in the water, and it will probably stay like that for a while," said Derek Lawless, head of WorldSpreads France.

"Big U.S. banks usually close their trading books in early December, and there is little chance to see them chase the market in the last three weeks of the year with the risk of turning a bad performance into something worse."

(Reporting by Blaise Robinson; Editing by Erica Billingham)

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