* FTSEurofirst 300 index falls 0.5 pct
* Spain worries hits euro zone peripherals
* Investors reluctant to go long ahead of Easter
By Joanne Frearson
LONDON, April 5 (Reuters) - European shares hit a two-month low on Thursday, with more losses seen as worries build over Spain’s debt burden and the possibility of more trouble in weaker euro zone states.
The FTSEurofirst 300 index dropped below a level where investors had previously come in to buy.
A disappointing bond auction on Spain on Wednesday was the trigger for many of the moves.
Diminishing expectations that the markets would receive another kick start from the U.S. Federal Reserve after the Fed March meeting on Tuesday also dented investor sentiment.
With markets closed over the Easter Break investors were unwilling to hold onto their positions.
The Italian FTSE MIB fell 1.9 percent to become the day’s worst performing exchange while the Spanish IBEX 35 index fell 0.7 percent.
“Spain is becoming the hot topic and that is a concern for the market. If borrowing costs rise there are worries that another country could fall,” said Angus Campbell, Head of Market Analysis at Capital Spreads. “There are fears of contagion.”
“This is combined with no new stimulus by the central banks. Investors are risk adverse.”
Earlier gains in banking stocks reversed, with the sector now featuring amongst the worst performers.
Belgian financial group KBC, which took state aid during the 2009-09 financial crisis, lost 5.4 percent to become one of the bottom performers on the FTSEurofirst 300 index .
UniCredit and Commerzbank, which both have exposure to euro zone peripheral debt were also hard hit down 5.3 percent and 4.3 percent respectively.
The pan-European FTSEurofirst 300 index of top shares was down 0.5 percent at 1,045.49 points hitting a two-month low and breaking a support level at 1,050 which represented its March low.
Traders said the index now had the potential to fall 1,027 its January low and an area where buying has emerged in the past.
“The index has moved through a support and I would not be surprised if it gets worse,” Will Hedden, sales trader at IG Index, said.
Britain’s FTSE 100 also reversed earlier gains and fell 0.4 percent after British factory output suffered its biggest monthly fall in almost a year in February, increasing worries about the country’s economic recovery.
There was little reaction, however, after the Bank of England kept keep interest rates and the target for its asset purchases unchanged.
Miners turned lower on the negative sentiment, having been one of the best performers earlier.
The sector whose performance is correlated with economic growth had been buoyed by data from China which showed the service sector expanded again in March.
But fund managers said the weakness could be viewed as a buying opportunity.
“Miners are very oversold and are due a catch up, we favour Rio Tinto and Xstrata,” said Jane Coffey, who manages a 326 million pounds ($515.68 million) for Royal London Asset Management and is head of equities.
“They are both cheap on a fund basis and offer a diverse spread of commodity exposure.”
According to Thomson Reuters DataStream data Rio Tinto and Xstrata trade on a one-year forward price to earnings ratio of 6.8 and 8.7 respectively, while the STOXX Europe 600 carry’s a forward price-to-earnings ratio of 10.7.