* Rumours of rating downgrade hit Italian stock market
* Initial relief over Cyprus deal fades away
* FTSEurofirst 300 falls 0.3 pct, Euro STOXX 50 down 1.2 pct
* Some investors keep long-term bullish outlook
* Financial stocks hit hardest
By Sudip Kar-Gupta
LONDON, March 25 (Reuters) - European shares fell on Monday, led lower by financial stocks, as relief over a Cyprus bailout faded after the Dutch Finance Minister said the stern deal could set a new template for the region.
Speculation of a credit rating downgrade for Italy, which is still struggling to form a government after inconclusive elections last month, also weighed on European equities.
The pan-European FTSEurofirst 300 index closed down 0.3 percent at 1,186.45 points, having risen as much as 1 percent at one stage, while the euro zone’s blue-chip Euro STOXX 50 index fell 1.2 percent to 2,649.28 points.
Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times that the Cyprus rescue represented a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors.
This raised worries that other debt-ridden countries with troubled banks may face similarly punitive measures as Cyprus, which agreed to close down its second-largest bank and inflict heavy losses on big depositors.
“The action taken sets a dangerous precedent. I just think there’s still a little sense of unease,” said Berkeley Futures associate director Richard Griffiths.
Griffiths said clients were looking to buy “put” options on the German DAX equity index, which give the right to sell an index in the future and are often used on expectations of a market fall.
He said investors had taken DAX “puts” due to mature in April with a strike price of 7,700 points - implying that some investors saw a 2 percent fall on the DAX, which fell 0.5 percent to 7,870.90 points, in the coming month.
In spite of the Cyprus worries, many investors kept a longer-term bullish outlook for European equities, expecting markets to recover after a dip in April due to prospects of a gradual recovery in the global economy.
The FTSEurofirst is still up 5 percent since the start of 2013, having risen 13 percent last year after the European Central Bank pledged to do “whatever it takes” to protect the euro currency from the region’s sovereign debt crisis.
Willem Sels, the UK head of investment strategy for HSBC Private Bank, said European equities remained attractive although investors should be wary over increasing their exposure to them for now in the wake of the Cyprus bailout.
“We remain optimistic on the outlook for equities, as we believe that investor sentiment will remain strong over the coming months as the strength of the global economy is confirmed, especially in the second half of the year,” he wrote in a research note.
Roche-Brune Asset Management fund manager Gregoire Laverne also kept a bullish long-term outlook on European shares, adding he had bought futures contracts on the STOXX Europe 600 Banking Index and the STOXX Europe 600 Insurance Index.
“Cyprus counts for very little in terms of the European economy. The worst is behind us,” he said.
However, others were more negative, focusing on renewed fears over Italy.
Italy’s benchmark FTSE MIB equity index fell 2.5 percent as traders cited speculation of a possible downgrade by rating agency Moody‘s, with Italian banks Intesa and UniCredit falling 6.2 and 5.8 percent respectively.
“It’s easy to speculate against Italy because there is no government,” said the co-founder of an Italian brokerage, who declined to be named.