* FTSEurofirst 300 down 0.9 pct, Euro STOXX 50 down 0.7 pct
* Euro STOXX 50 testing support at 100-day moving average
* Peugeot shares set to further drop as GM sells stake
PARIS, Dec 12 (Reuters) - European stocks extended a two-week sell-off on Thursday as investors booked profits, wary that the U.S. Federal Reserve will start winding down its stimulus programme soon.
The FTSEurofirst 300 index of top European shares fell 0.9 percent to 1,244.66 points, a level not seen since mid-October.
The benchmark index - which was up 15 percent on the year at the end of November - has dropped 4.5 percent since then, its biggest decline in six months.
European stocks trimmed their losses in late trade after data showed more Americans filed claims for unemployment benefits last week, reversing three weeks of declines.
"The data is quite soft, but I don't think it really changes the big picture, after the string of pretty strong figures such as the GDP we just got," Saxo Bank sales trader Andrea Tueni said. "The deal on the budget has also removed a hurdle for the Fed, which will probably announce something next week.
"It could be a first cut in quantitative easing, or a time frame for it. All in all, the market is pricing in some kind of tapering in December, but there's no panic, just some profit taking."
The provisional budget deal in Washington this week has triggered speculation the Fed could start trimming its bond-buying programme as early as next week.
Investor sentiment was also hurt on Thursday by data that showed euro zone industrial output dropped at its worst monthly rate in more than a year in October, a sign the region's recovery remains fragile.
Banking shares were among the biggest losers, with Commerzbank losing 2.5 percent and UBS down 1.9 percent.
Around Europe, UK's FTSE 100 index fell 1 percent, Germany's DAX index down 0.7 percent, and France's CAC 40 down 0.4 percent.
The euro zone's blue-chip Euro STOXX 50 index fell 0.7 percent at 2,928.12 points, after testing a key support level at 2,926.19 points, representing the index's 100-day moving average. Breaking below it would send a technical bearish signal.
For Psigma Investment Management's fund manager Tim Gregory, however, the current pull-back represents a buying opportunity.
"We think there is a chance that Fed tapering will begin next week," he said. "However, whether it is December, January or March is less important than the fact that the Fed feels able to make a start on withdrawing quantitative easing.
"Equities remain our asset class of choice on a five-year view so we would prefer to adopt a strategy of buying dips over selling rallies."
A Reuters poll showed on Thursday that fund managers, traders and analysts see European stocks extending their strong rally into 2014, driven by optimism about a more durable economic recovery and the prospect of a long period of very accommodative monetary policy.
However, shares in struggling carmaker PSA Peugeot Citroen sank 7.6 percent on Thursday, after it announced a big writedown and confirmed that it was mulling a capital increase.
The stock was set to further sink on Friday. After the European closing bell, General Motors Co said it would sell its entire 7 percent stake in Peugeot through a private placement to institutional investors.
According to traders, the shares will be offered at between 10 euros and 10.25 euros a share, representing a discount of as much as 5.9 percent to Thursday's closing price.