* FTSEurofirst 300 down 0.9 pct, Euro STOXX 50 down 1.1 pct
* Both indexes test strong support levels
* Thin trading volumes as investors in wait-and-see mode
* European equity funds an 'unlikely haven' -EPFR
By Blaise Robinson
PARIS, Oct 7 (Reuters) - European stocks dropped on Monday in thin volumes, with one benchmark index hitting a four-week low as investors fretted over lack of progress in resolving Washington's budget standoff.
Shares in luxury goods makers were among the heaviest fallers after Burberry's CEO was quoted in French daily Les Echos as saying that the slowdown in luxury goods sales in China may constitute a new market trend.
Burberry dropped 1.7 percent, while France's LVMH was down 2.2 percent, and Swiss watch maker Richemont lost 1.6 percent.
At 1035 GMT, the FTSEurofirst 300 index of top European shares was down 0.9 percent at 1,233.01 points, a level not seen since Sept. 10.
The benchmark tested a key technical level at 1,232.47, the index's 50-day moving average, seen as a major support.
The euro zone's blue-chip Euro STOXX 50 index was down 1.1 percent, at 2,897.38 points, testing a support level at 2,900, which represents the 23.6 percent Fibonacci retracement of the rally from late August to mid-September.
"Despite the rise in the selling pressure we've seen recently, supports are holding for now," Aurel BGC chartist Gerard Sagnier said.
"We're entering a phase of stabilisation, and the positive trend in the medium term is intact. The medium- to long-term target for the Euro STOXX 50 is 3,100."
U.S. Democrats and Republicans came no closer on Sunday to a budget agreement that would end a government shutdown, let alone reaching a deal on the U.S. borrowing limit by Oct. 17 to avoid what would be an unprecedented default.
Republican House Speaker John Boehner said he would not raise the debt ceiling without a "serious conversation" about what is driving the debt. Democrats said it was irresponsible and reckless to raise the possibility of a default.
"Volumes are low, with the U.S. government shutdown forcing the postponement of key data such as the monthly payrolls," FXCM analyst Vincent Ganne said. "Slowly, risk aversion is creeping up, with negative trends on all risky assets such as stocks, copper and oil."
Around Europe, UK's FTSE 100 index was down 0.8 percent, Germany's DAX index down 1.1 percent and France's CAC 40 down 1 percent.
Bucking the trend, shares in Banca Monte dei Paschi di Siena rose 4.8 percent on news that the loss-making Italian lender is set to unveil a new restructuring plan later on Monday, which it hopes will secure European Union approval for its state bailout.
Despite the two-week slide, the FTSEurofirst 300 index is only 3.3 percent off a five-year high hit in September, supported by steady investment inflows as a pick-up in the region's economy encourages investors to switch out of government bonds and into European stocks.
According to fund-tracking firm EPFR Global, European equity funds have emerged as an 'unlikely haven' for investors in the third quarter, enjoying record investment inflows.
For the week ended Oct. 2, European stock funds attracted $900 million in new cash, the 14th straight week of inflows, with retail investors committing fresh money into European stocks in six of the last eight weeks, EPFR said.