European shares inch up early, helped by defensives

* FTSEurofirst 300 up 0.1 pct, Euro STOXX 50 flat

* S&P's mass downgrade seen as already priced in

* Euro zone shares trading at big discount to U.S. shares

By Blaise Robinson

PARIS, Jan 16 (Reuters) - European stocks pared early losses and inched higher in morning trade as gains in defensive shares such as pharmaceuticals offset a drop in banking stocks following S&P's expected mass credit rating downgrade of euro zone countries.

At 0940 GMT, the FTSEurofirst 300 index of top European shares was up 0.1 percent at 1,018.63 points after losing as much as 0.5 percent in early trade.

GlaxoSmithKline was up 0.5 percent while Societe Generale was down 2.4 percent and UniCredit down 1.4 percent.

"A one-notch downgrade for France was completely priced in, so no negative surprise here, and quite logical after the United States got downgraded. But the question now is: how will this affect the EFSF rating?," said David Thebault, head of quantitative sales trading, at Global Equities.

Late on Friday, S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and France, Austria, Malta, Slovakia and Slovenia by one notch each.

It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, the Netherlands, Luxembourg and still triple-A-rated Finland.

"France has already been paying more than Germany for its debt, so S&P's move comes in line with the current hierarchy of the yields on the market," said Romain Burnand, co-head of Paris-based Moneta Asset Management.

"Clearly, very few investors are changing their asset allocation following the downgrade," he said.

The euro currency held near a 17-month low against the dollar On Monday while German Bund futures erased early gains after failing to break above the record high hit late last week when media reports first flagged the imminent downgrade of euro zone sovereign credit ratings.

"What really matters at this point is the measures by policymakers to fix things, and the recent change in policy by the European Central Bank, such as cutting interest rates and providing unlimited liquidity, is really changing the game," Thebault said.

Around Europe, UK's FTSE 100 index was down 0.2 percent, Germany's DAX index was up 0.2 percent, and France's CAC 40 down 0.2 percent.

The euro zone's blue chip Euro STOXX 50 index, a barometer of investor sentiment towards the region, was flat, at 2,336.80 points.

The benchmark index sank 17 percent in 2011, sharply underperforming Wall Street, hit by fears the escalating euro zone debt crisis would lead to massive defaults and write-downs and push the region into recession.

Shares in the index trade at 9.3 times 12-month forward earnings, versus 11.9 times for stocks on the S&P 500 index , Thomson Reuters Datastream data shows.

The euro zone index's relative performance versus the S&P 500 index, in U.S. dollar based total return, is at its lowest point since the creation of the euro zone index in the late 80s, data shows.

But despite relatively cheap valuation levels, fund flows into European equities remain negative, according to research firm EPFR Global, whose data for the seven-day period ended on Jan 11 showed Europe equity funds posting outflows for the ninth time in the past 10 weeks.