January 9, 2014 / 6:22 PM / 4 years ago

UPDATE 1-European shares stumble over Paris debt warning

* France's CAC falls 0.8 pct, hit by debt warning

* FTSEurofirst 300 falls 0.4 pct to 1,315.39 points

* ESTOXX 50 falls 0.7 pct to 3,090.26 points

* Peripheral markets of Spain and Italy outperform

* IBEX slips 0.2 pct but FTSE MIB rises 0.3 pct

By Sudip Kar-Gupta

LONDON, Jan 9 (Reuters) - European shares closed lower on Thursday, hit by a warning over France's debt that weighed on the Paris bourse and by a dip in U.S. stocks, which edged back from record highs.

The pan-European FTSEurofirst 300 index, which earlier reached new five-and-a-half-year highs, fell 0.4 percent to 1,315.39 points. The euro zone's blue-chip Euro STOXX 50 index fell 0.7 percent to 3,090.26 points.

France's CAC equity index was Europe's worst-performing market, falling 0.8 percent. Traders said a warning about the country's debt from an official had contributed to the Paris sell-off.

Didier Migaud, head of the French public audit office, said French national debt had reached a "danger zone."

"The market is getting nervous about what's going on in France," said Michel Juvet, chief investment officer at Swiss bank Bordier.

France has failed to keep pace with growth in Germany, Europe's economic powerhouse, and signs emerged this week that it might also be underperforming peripheral European economies such as Italy and Spain.

Italy and Spain are slowly recovering from the euro zone's sovereign debt crisis. Data this week showed Spanish manufacturing expanded slightly in December. It contracted in France.

Richard Edwards, head of trading and research firm HED Capital, felt France had to do more to restructure its economy.

"Spain has been taking the medicine, whereas in France they still have a tremendous sense of entitlement," he said.

PERIPHERAL OUTPERFORMANCE

Spain's IBEX equity index fell 0.2 percent but nevertheless outperformed the broader European equity market. Italy's FTSE MIB also outperformed with a 0.3 percent rise.

Spain and Italy have been helped by a pledge made in 2012 by European Central Bank (ECB) head Mario Draghi to do "whatever it takes" to protect the euro currency from the region's sovereign debt crisis. His pledge help European equities to rally over the past two years -- the FTSEurofirst 300 rose 16 percent in 2013.

The ECB kept interest rates at a record low of 0.25 percent on Thursday and Draghi expressed his determination to use all available tools to fight off deflationary pressures.

Andrew Arbuthnott, head of large-cap European equities at Pioneer Investments, felt that over the course of 2014, European equities would continue to move higher.

Some traders said the best way to cash in on this backdrop of a broad European economic recovery was to bet on an upturn in markets which were hardest hit by the euro zone's debt crisis, such as Spain, Italy, Portugal, Ireland and Greece.

Peripheral euro zone markets have had a strong start to 2014. Lisbon's PSI 20 has risen 7.9 percent, Madrid's IBEX has gained 3.2 percent, Milan's FTSE MIB has advanced 2.8 pct and Athens's ATG equity index is up 10.9 percent.

By contrast, Germany's DAX - which has already hit record highs - is down 1.4 percent since the start of 2014 and France's CAC has fallen 1.6 percent.

"It's in the southern euro zone that the upside potential remains the biggest," said Regis Begue, head of equities at Lazard Freres Gestion.

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