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* FTSEurofirst down 0.1 percent
* Banks pare gains as Italy debt yields rise
* RBS, Lloyds up on bid talk
* Royal Dutch Shell falls on oil spill fears
By David Brett
LONDON, April 12 (Reuters) - Europe's top shares were lower by midday on Thursday with banks paring gains as a sharp rise in Italy's borrowing costs provided a further sign markets are not convinced that Europe is on top of its debt problems.
Integrated oils and Royal Dutch Shell dragged most heavily after the firm reported a spill in the Gulf of Mexico.
By 1033 GMT, the FTSEurofirst 300 shed 0.83 points, or 0.1 percent at 1,032.97, albeit in choppy trade.
The Euro STOXX 50 shed 0.3 percent at 2,378.61 having suffered a 4.5 percent decline over the last five days which all but eradicated its year-to-date gains.
The Euro STOXX 50 volatility index, or VSTOXX, Europe's main barometer of market anxiety, has risen around 35 percent over the last six trading days.
Budget troubles in Spain and concerns about slowing global growth have driven up borrowing costs for other indebted euro zone states, notably Italy, the bloc's third-biggest economy, as a bond rally driven by the European Central Bank's massive liquidity injections fades.
Italian three-year bond yields rose more than a full percentage point at an auction on Thursday, while the sale's cover ratio fell compared with last month.
Banks, which have tumbled 21 percent in three weeks as contagion fears have been revived, pared early gains in the lead up to the Italian debt auction.
Banks listed in Portugal, another euro zone country struggling with its debts, were trading at euro-lifetime lows.
Craig Erlam, market analyst, at Alpari said Thursday's trading reflected "investors' reluctance to commit either way as they look for clarity on what the euro zone leaders will do next to temporarily relax the markets."
Erlam said there had been little reaction in stocks to Wednesday's hint by ECB executive board member Benoit Coeure that the central bank might be willing to buy more government bonds, with investors awaiting something more concrete.
London-listed Royal Bank of Scotland bucked the weaker trend, rising 1.2 percent on renewed talk that Arab investors, including Qatar and Abu Dhabi, had offered the British government 30 pence a share for 29 percent of its 81 percent stake in the bailed-out UK lender, just over half of what the government paid for the shares in 2008.
Peer Lloyds Banking Group rose 2 percent as new British banking venture NBNK submitted a fresh bid proposal for 632 Lloyds retail bank branches, putting it back in competition for the assets with conglomerate The Co-Op, which has warned it may drop out of the bid battle.
Royal Dutch Shell shed 4.2 percent, topping the FTSE 100 fallers list, after the Anglo-Dutch firm said an oil sheen spotted near one of the firm's platforms in the central Gulf of Mexico caused it to send a spill response vessel and seek aircraft overflights.
"The cause of the sheen is as yet unknown, but Shell has no indications of incidents from data at either of its platforms, both of which are continuing to operate. While the extent of the sheen, reported at 1 mile by 10 mile, is large and will be a concern, the sheen is light and could result from volume of only a couple barrels," RBC Capital said in a note on the news.
The report came on the day BP will run the gauntlet of protests from environmentalists and investors at an annual shareholder meeting where it will make the latest in a series of attempts to put its own Gulf of Mexico spill behind it.
BP's shares fell 2.1 percent on Thursday, but they more than halved in value between May and June 2010 after the spill.
The technical outlook for the benchmark European index remains grim after it broke below a positive trendline started in September, sending a strong bearish signal.
Citigroup said it is scaling back its short-term view on stocks, even though valuations continue to support a more positive longer-term view.
Citi downgraded UK equities to "neutral" from "overweight", joining a still-"neutral" rating on the rest of Europe.
A bearish outlook saw Nokia shed 4.4 percent, extending the previous session's sharp losses on the back of a profit warning, as brokers and banks began to cut targets and estimates for the company.
"The second quarter guidance was a big disappointment considering market expectations," says Pohjola Bank analyst Hannu Rauhala.
Carrefour, Europe's biggest retailer, laid bare the pain being felt by austerity-hit shoppers, reporting a plunge in demand for discretionary purchases such as clothing and electricals and a deteriorating performance at its core French hypermarkets.
The recent retreat in European equities - sparked by the fresh concerns about Spain and slowing growth in China and the United States - has seen indexes plough through support trendlines, channels and 200-day moving averages.
That has provided a buying opportunity for speculators willing to take a punt on beaten-down assets such as basic resource stocks and automakers where valuations remain enticing.
Elswhere, Infineon rose 4 percent and was the biggest gainer in the FTSEurofirst 300, boosted by Deutsche Bank raising its rating on the stock to 'buy' from 'hold'.
"We believe a return to more than 15 percent (earnings per share) EPS growth trajectory should drive a re-rating towards global peers," Deutsche analyst Kai Korschelt said in a note.
Falls on the main indexes were buffered as U.S. futures indicated a firmer start on Wall Street ahead of U.S. February international trade figures, due at 1230 GMT with March U.S. producer prices and latest weekly initial jobless claims.