European shares dented by E.ON downgrade

* FTSEurofirst 300 falls 0.3 pct, coming off 2-month highs

* Euro STOXX 50 declines 0.5 pct

* E.ON hit by downgrade, Libor probe hurts bank stocks

By Sudip Kar-Gupta

LONDON, July 4 (Reuters) - European shares ended a three-day winning streak on Wednesday, dragged back from two-month highs by a fall in German utility E.ON, and traders said unresolved worries about the euro zone's debt crisis would limit equity market rallies.

The FTSEurofirst 300 index fell 0.3 percent to 1,042.94 points, while the Euro STOXX 50 declined by 0.5 percent to 2,308.25 points. Volumes were relatively thin, with U.S. markets closed for the Independence Day holiday.

European equity markets have been supported by expectations that the European Central Bank (ECB) may cut rates on Thursday and hold out hope of further steps to help the region's struggling economies and debt-ridden banks at a later stage.

However, data on Wednesday which showed an unexpected stagnation in Germany's services sector highlighted the region's problems, despite measures taken at a European Union summit last week to battle the debt crisis.

"People are only buying for the short term, and the bias is still towards the downside," said Mike Turner, European equity options broker at London-based firm XBZ Ltd.

Heavyweight German utility E.ON was among the worst-performing stocks, falling more than 3 percent and pushing down Germany's benchmark DAX index after investment banks Citi and JP Morgan downgraded it.

LIBOR SCANDAL HITS BANK STOCKS

Bank stocks also fell, with the STOXX European bank sector declining by 0.9 percent. Traders mentioned that the fall-out from a Libor (London Interbank Offered Rate) interest-rate rigging probe was hitting sentiment towards the sector.

"We've been sellers into this last rally. We've been selling Britain's FTSE on the back of the banking crisis and taking profits on the DAX," said Toby Campbell-Gray, head of trading and risk at Tavira Securities.

The EU summit on June 29, which came up with new measures including plans to help ease Spanish and Italian borrowing costs, prompted European equity markets to rally back after falling sharply for much of June.

The Euro STOXX 50 index had risen 7.5 percent during the last three sessions, representing its biggest three-day gain since late November. The index ended at 2,320.43 on July 3, marking its highest close since 2,344.02 on April 27.

However, Central Markets senior broker Joe Neighbour predicted European equities would remain under pressure, given that the euro crisis has yet to be resolved.

"We still don't think the European problems have been fixed. We remain bearish in the medium term."