RTRS:Oils weigh as Europe shares fall, Italy debt eyed
* FTSEurofirst falls 0.3 percent
* Royal Dutch Shell slip on oil spill fears
* BP lower ahead of AGM
* RBS rises on Arab bid talk
By David Brett
LONDON, April 12 (Reuters) - European shares fell early on Thursday, spooked by a weaker oil sector as reports of a spill in the Gulf of Mexico prompted a sharp retreat in Royal Dutch Shell, while euro zone production data and an auction of Italian bonds loomed.
By 0757 GMT, the FTSEurofirst 300 was down 3.22 points, or 0.3 percent at 1,030.58, while the Euro STOXX 50 shed 0.4 percent at 2,375.97 having suffered a 4.5 percent decline over the last five days which all but eradicated the year-to-date gains.
"The outlook across the euro zone remains sluggish, which has halted the early 2012 rally in equities and there are fears of a larger market correction waiting to happen," a London-based trader said.
"Attention is again zeroing in on Europe's debt crisis, so expect any major spike in Italian bond yields to reverberate through equity markets," he said.
On Wednesday, Italy's one-year borrowing costs doubled in a sale of short-term bills. On Thursday Italy plans to offer up to 5 billion euros, including its March 2015 BTP bond and 3 off-the-run issues, with yields expected to rise there too.
There was also euro zone production data due out at 0900 GMT.
The main drag on the index was the oil sector with Royal Dutch Shell down 2.6 percent after an oil sheen spotted near one of the firm's platforms in the central Gulf of Mexico caused the company to send a spill response vessel and seek aircraft overflights, a Shell spokeswoman said.
BP shed 1.5 percent as the firm runs the gauntlet of protests from environmentalists and investors at an annual shareholder meeting where it will make the latest in a series of attempts to put its own Gulf of Mexico spill behind it.
Traders cited Morgan Stanley's downgrade to "underweight" from "equalweight" as weighing on luxury goods firm PPR's shares, down 2.2 percent.
And Nokia slipped 5 percent, extending sharp falls a day earlier as several banks and brokers cut price targets for the shares after the Finnish cellphone maker's profit warning on Wednesday.
BROKER CAUTION
The technical outlook for the benchmark European index remains grim after it broke below a positive trendline started in last September, sending a strong bearish signal.
After a solid start to the year for global equities and a feeding through of more optimistic earnings revisions from many analysts, Citigroup said it is scaling back its short-term view on stocks, even though valuations continue to support a more positive longer-term view.
Citi downgraded UK equities to "neutral" from "overweight", joining a still-"neutral" rating on the rest of Europe.
It upped global industrials to "overweight" and cut financials to "neutral", and replaced "expensive" consumer staples with "cheap" utilities as its preferred defensive sector. It also cut telecoms to "underweight".
Citi, however, cut its rating for United Utilities, which fell 1.2 percent, to "neutral" from "buy".
BARGAIN HUNTING
The recent retreat in European equities -- sparked by concerns that Spain's economy will be the next to hit the buffers and slowing growth in China and the U.S. -- has seen indexes plough through support trendlines, channels and 200-day moving averages.
That has provided a buying opportunity for speculators willing to take a punt on beaten down assets such as basic resource stocks, automakers and the banks, which tumbled 21 percent in three weeks on contagion concerns.
London-listed Royal Bank of Scotland was among the top early gainers, rising 1.7 percent on talk that Arab investors, including Qatar and Abu Dhabi, had offered the British government 30 pence a share for 29 percent of its 81 percent stake in the UK lender, just over half of what the government paid for the shares in 2008.
Investors cheered Carrefour, up 1.9 percent, after Europe's biggest retailer vowed to cut prices to lure back consumers, predicting another tough year as cash-strapped shoppers reduce spending.
Results from Aggreko were also greeted with enthusiasm by investors. Its shares rose 2.3 percent as the world's biggest temporary power provider, said underlying revenue had risen by more than 20 percent in the first three months of the year, putting it on track for further growth in 2012.
Infineon Technologies rose 4.2 percent, topping the list of FTSEurofirst gainers, as Deutsche Bank upgraded its rating on the German chipmaker to "buy" from "hold"
