UPDATE 1-Norway ends ban on short-selling financial stocks

* Financial watchdog lifts ban on short selling financials

* Shares in DnB NOR fall 4.0 pct, Storebrand's off 1.3 pct

(Adds market reaction, details)

OSLO, Sept 28 (Reuters) - Norway's financial market watchdog lifted a ban on short-selling banking and insurance shares on Monday, as calmer market conditions ended the need for trading restrictions to prevent damaging volatility in financial stocks.

Several European countries such as Belgium and Austria have recently extended short-selling curbs, but Norway's Financial Supervisory Authority said it would no longer consider short selling of shares in financial institutions a breach of securities law.

"The market situation has changed and is now of such a nature that trading short in the shares ... in question is no longer considered on a general basis to contravene with the Securities Trading Act," the regulator said in a statement.

Many countries introduced measures last autumn to restrain or even ban short selling after the collapse of Lehman Brothers sparked heavy selling in financial shares. Britain in January ended its blanket ban on short-selling financials but required investors to disclose short positions.

Shares in Norway's biggest banking group DnB NOR DNBNOR.OL fell 4.0 percent by 0837 GMT, in part due to the short-selling decision and partly in reaction to Friday's sharp rise, a trader said.

Insurance group Storebrand's (STB.OL) stock traded down 1.3 percent against a 0.9 drop in Oslo's main index .OSEBX.OL.

The financial watchdog said on Oct. 8 last year it would prohibit short selling in financial shares on a temporary basis due to the financial market turmoil.

The ban had applied to shares in DnB NOR and Storebrand as well as shares and primary capital certificates in a number of smaller savings banks and insurance companies.

DnB NOR shares jumped 9.9 percent on Friday when it announced a $2.4 billion rights issue to strengthen its capital ratio and said it would not tap Norway's bank relief fund. [ID:nLP390655] (Reporting by Richard Solem; Editing by David Holmes)