* FTSEurofirst 300 down 0.2 pct, Euro STOXX 50 down 0.7 pct * Bundesbank denies report has stopped accepting peripheral bonds * Euro zone's manufacturing shrinks at faster pace * New-year rally boosted valuations to 11-mth high By Harro Ten Wolde FRANKFURT, April 2 (Reuters) - European shares were flat on Monday, giving up early gains due to renewed nervousness about the euro zone after media reports said Germany's Bundesbank had stopped accepting the bonds of Portugal and other peripheral countries as collateral. The Bundesbank denied the reports but they hit banking shares and stocks in peripheral euro zone markets. The German central bank said it continued to accept all euro zone sovereign bonds. "This indicates nervousness about the euro zone sovereign debt is not gone at all," a German trader said. At 1130 GMT, the FTSEurofirst 300 index of top European shares was down 0.2 percent at 1,066.90 points, after ending its best first quarter since 2006 on Friday with a 6.8 percent gain since the start of the year. Around Europe, UK's FTSE 100 index was flat, France's CAC 40 lost 0.3 percent and Germany's DAX index was up 0.2 percent. Spain's IBEX fell 1.5 percent, Portugal's PSI 20 dropped 0.9 percent and Italy's FTSE MIN lost 1.5 percent. Banking shares were among the biggest losers, with the sector index dropping 1.7 percent. HSBC, Santander and BNP Paribas lost between 1.4-2 percent. Zurich Financial plunged 6.5 percent as it went ex-dividend, pulling the insurance sector down. The stock trades 17.00 francs ex-dividend. A purchasing managers' survey showing the euro zone's manufacturing sector shrank for an eighth month and at a faster pace in March added to signs the bloc is in recession as the downturn spread to core members France and Germany. Earlier, surprisingly strong Chinese manufacturing data had eased recent worries over the country's economic outlook, boosting risk appetite in global markets and supporting shares of resources companies in London, which held onto gains. The sector index was up 0.6 percent, led by Fresnillo, Rio Tinto and BHP Biliton, all gaining between 1 and 3 percent. Strategists have turned more reserved about European equities after the new year rally, which boosted valuations to 11-month highs. The euro zone's blue chip Euro STOXX 50 index is trading at 9.8 times 12-month forward earnings, a level not seen since early May 2011, although still below the index's 10-year average price-to-earnings ratio of 11.6. The index, down 0.7 percent on Monday, briefly broke its key resistance level at 2,485 points, representing the 23.6 percent Fibonacci retracement of its recent two-week retreat. The broader Stoxx 600 index, up 0.45 percent at 264.58 points, is trading at 10.7 times 12-month forward earnings. Strategists at Deutsche Bank turned neutral on the index, although they still expect it to end the year at 275 points. "This is 4 percent above current levels, but a 4 percent index return perhaps does not compensate for the near-term risks that the global economy might face," said Michael Biggs, strategist at Deutsche Bank, cutting his view on the market to neutral from positive. Analysts at Exane BNP Paribas also turned bearish, withdrawing their positive trading call on European equities, citing "negligible scope for further declines in corporate bond yields, renewed tensions in sovereign debt markets amid political uncertainty and higher oil prices." "Our fundamental bear case, which argues that equity markets have only partly priced in the lower trend growth in the advanced economies in the years to come, remains intact," said Exane analyst Bert Jansen. Fund tracker EPFR said European equity funds had seen outflows since the start of the fourth quarter of 2011 of close to $20 billion despite a brief return by retail investors after a nine-month absence. "In contrast to much of 2011, institutional flows to Germany equity funds did not partially offset redemptions from regional and other country funds," the research firm, which tracks both traditional and alternative funds globally, said in a note. (Additional reporting by Blaise Robinson in Paris; Graphics by Vincent Flasseur; Editing by Susan Fenton)

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