Italy leads Europe shares lower after bond auction

* FTSEurofirst 300 index down 0.1 percent

* Italy underperforms after Italian bond auction

* Technicals "oversold" on FTSEurofirst 300 index

By Joanne Frearson

LONDON, Nov 25 (Reuters) - European shares fell on Friday amid choppy trade and low volume, and were on track for the worst weekly loss since September after a disappointing bond auction in Italy, with Italian stocks bearing the brunt of the falls.

Technicals, however, kept the broader pan-European FTSEurofirst 300 index from falling further as the Relative Strength Index (RSI) came close to 30 - a momentum indicator - a reading of 30 or below is considered "oversold", while 70 and above is "overbought".

Italy's FTSE MIB, down 1.8 percent, was the underperformer in Europe after the country paid a record 6.5 percent to borrow over six months and yields on two-year Italian BTP bonds soared to a euro lifetime high.

Italian banks, whose performance is highly correlated to bond yields due to their exposure to the countries debt, continued their slide lower after the Italian auction.

Banca Monte dei Paschi di Siena was down 5 percent to become one of the main fallers in Italy and in Europe after the auction, while Intesa Sanpaolo was down 2.5 percent underperforming the STOXX Europe 600 Banks index.

"Italian yields at these levels are not sustainable at these levels for any length of time," Joe Rundle, head of trading at ETX Capital, said.

"While there is a lack of action by politicians (Italian) yields are going to drift higher and we are going to keep seeing pressure on the equity markets."

He added that the market moves were being determined by short-term trades rather than long-term positioning and said even if there were days of gains people would quickly sell into these unless a solution was found for the region's debt crisis.

"People are looking to make trades on the short side or are selling into any upside," Rundle said.

The broader pan-European FTSEurofirst 300 index fared better to the FTSE MIB and was down 0.1 percent at 890.98 points by 1230 GMT as investors looked past the Italian bond auction and bought up "oversold" stocks.

"Technically it is clearly oversold and we saw some buyers coming in around the psychologically important 900 level," Mike McCudden, head of retail derivatives at Interactive Investor.

Investors came for French insurer AXA which topped the FTSEurofirst 300 index after Goldman Sachs raised it to "buy" from "neutral" and added it to its "conviction buy" list.

But volume on the FTSEurofirst 300 index was at 25.6 percent of its 90-day daily average, with markets only open for a half-day of trading in the U.S. following the Thanksgiving holiday.

"With low volumes abounding technical levels don't really tend to stick and the bears are still clearly in control. Buyer beware," McCudden said.

The FTSEurofirst 300 index was trading under its 61.8 percent Fibonacci level at 920.05 points from its September low to its October high and ETX's Rundle expected the index to re-test these lows.

The index is on track to record its seventh consecutive day of losses and make a weekly loss of 5.7 percent - its biggest weekly loss since September.