* FTSEurofirst 300 index down 0.6 pct
* Pares losses after European Commission's recommendations
* Charts bearish, key index sees "death cross"
By Atul Prakash
LONDON, May 30 (Reuters) - European shares pared losses on Wednesday after the European Commission called for a recapitalisation of euro zone banks from its permanent bailout fund, although sentiment remained fragile and charts painted a bearish picture for equities.
The Commission said the euro zone must boost growth and cut debt to regain investor confidence, but should also move towards a banking union and consider euro bonds. It also said the vicious circle of weak banks and indebted sovereigns lending to each other needed to be broken.
Spain's benchmark IBEX stock index briefly turned positive and was last down 0.4 percent. The index hit a nine-year low earlier in the session and is down about 27 percent this year.
At 1202 GMT, the FTSEurofirst 300 index of top European shares was down 0.6 percent at 985.19 points, after falling to a low of 976.25 earlier. The index has fallen about 6 percent this month on euro zone troubles, with concerns rising about Spain's troubled banks.
Investors stayed jittery as the yield premium investors demand to hold 10-year Spanish bonds rather than German benchmarks rose to 540 basis points, the highest since the launch of the euro, while Spanish yields rose to 6.6 percent. Funding costs are seen as unsustainable beyond 7 percent.
"These are dangerous signs as in the past, crossing such levels led Portugal, Greece and Ireland to seek international bailout," Koen De Leus, strategist at KBC Securities, said.
"If things don't improve and the European Central Bank doesn't intervene in the bond market, the fear of a collapse of the euro zone will rise and stocks could easily fall 10 percent in a couple of weeks."
European basic resources index, down 2 percent, was the top faller, mirroring a sharp decline in key base metals prices, on indications that China may take a cautious approach in stimulating its economy.
Some analysts saw a ray of hope.
"It's a brave move to buy European equities in the current environment, but our sentiment indicator is slowly getting out of the 'risk off' territory and indicating that there is no urgency to get out of your holdings in riskier assets," said Julien Turc, head of cross-asset quantitative strategy at Societe Generale.
"If it stabilises around the current level, I wouldn't object to keeping long equity positions," he said, adding the risk indicator was based on six variables and an average of implied volatility and other risk premia across various asset classes.
But charts remained bearish and showed the blue chip Euro STOXX 50 index's 50-day moving average crossed below the 200-day moving average, a strongly bearish technical signal called 'death cross'.
The index was down 0.5 percent at 2,148.77 points.
"We recommend to stay away from the Euro STOXX 50," Petra von Kerssenbrock, analyst at Commerzbank, said. "This crossing also indicates that the weakness is likely to continue."
She saw the first support for the index at around 2,112, a low in May, and then near 2,065, a low point reached in November. On the upside, the first resistance was seen at 2,200 as it was tested several times on the way down and had now become a near-term resistance level, she added.
Among individual movers, Italian truck and tractor maker Fiat Industrial rose 2.3 percent after saying it wanted to merge its farm equipment unit CNH into the group, a further step to simplify its structure after the spin-off from carmaker Fiat in 2010.