European shares retreat, CAC down after France downgrade

* FTSEurofirst 300 down 0.3 pct CAC falls 0.6 pct

* Knee-jerk reaction following France's downgrade

* Cyclicals lose ground; banks, construction down

By Atul Prakash

LONDON, Nov 20 (Reuters) - European shares edged lower on Tuesday, with France's CAC 40 index among the worst hit after ratings agency Moody's stripped the euro zone's No. 2 economy of its top credit rating.

While the downgrade had been expected and was largely priced-in, analysts said the previous session's big gains - when the FTSEurofirst 300 posted its biggest daily rise in 10 weeks - meant some were using it as a reason to take profits.

At 0919 GMT, the FTSEurofirst 300 was down 0.3 percent at 1,088.10 points after surging 2.3 percent on Monday. France's CAC 40 was 0.6 percent lower, led by domestic firms such as utilities, construction and telecoms, while multinationals with a big exposure to foreign markets rose.

EDF was down 1.8 percent, Bouygues fell 1.6 percent and France Telecom dropped 1.5 percent, while luxury goods maker LVMH gained 0.8 percent and retailer Carrefour was up 1.4 percent.

"It (the France downgrade) is disappointing and an indication that core Europe is suffering a bit," said Graham Bishop, senior equity strategist at Exane BNP Paribas. "But the market has been talking about this for a while. It's just a knee-jerk reaction, and not a game changer."

Moody's Investors Service cut France's sovereign rating by one notch to Aa1 after the market close on Monday, citing an uncertain fiscal outlook as a result of the weakening economy. The move followed a similar downgrade by peer Standard & Poor's in January and was widely expected.

"The market has been expecting it for more than a year now. It might have an impact on the short term, but it won't last. All in all, CAC 40 companies are big multinationals, they won't be impacted by this," David Thebault, head of quantitative sales trading at Global Equities, said.

Cyclical shares, which generally react more to changes in economic conditions, suffered the most, with the STOXX Europe 600 Banking index down 1.1 percent and the construction sector 0.6 percent lower, retreating after Monday's spike of 3.6 percent and 3 percent respectively.

Italian carmaker Fiat, down 4.9 percent, topped the decliners' list on a wider sell-off after UBS cut its rating on the stock to "neutral" from "buy".

Investors remain positive on the stock market's outlook in the coming months, however, and expect a further rally if U.S. politicians make progress in talks to avoid the so-called fiscal cliff - $600 billion of tax rises and spending cuts scheduled for early next year which threaten to tip the world's biggest economy back into recession.

"We expect that by the year end, we will recover some of the losses we made over the last month and start the new year broadly in a positive trajectory," Bishop said. "We like industrials, media, business services and banks, but don't like sectors such as food and beverages and luxury goods."