* FTSEurofirst 300 index falls 0.1 percent
* CAC 40 weighs on European shares
* BNP slumps on report of possible $10 billion fine
* ECB easing hopes fuel monthly rise (Updates with closing prices and no other changes to text)
By Alistair Smout
EDINBURGH, May 30 French shares underperformed on Friday after a report saying the U.S. Justice Department was pushing blue chip bank BNP Paribas to pay more than $10 billion to resolve a criminal inquiry.
The French bank's shares were down 2.5 percent after earlier falling around six percent after the Wall Street Journal reported the figure late on Thursday, citing people familiar with the matter. The case relates to allegations that the bank evaded U.S. sanctions against Iran and other countries for years. BNP and the Justice Department declined to comment.
The bank had set aside around 2.7 billion euros ($3.7 billion) for litigation-related costs.
"We had already reduced our position slightly at the start of the year ... Now that with these headlines the stock has dropped heavily, we haven't touched it. We don't dare accumulate more at this stage," Yohan Salleron, fund manager at Mandarine Gestion in Paris, said.
"For me the worst thing is the uncertainty over the size of the fine ... There is a very real reputation risk here. It could spook certain counterparties into staying away from BNP."
Citi removed BNP Paribas from its Focus List Europe citing the uncertainty, but retained a "buy" rating on the shares.
The news is the latest setback for a euro zone banking sector, which is still nearly 70 percent below its 2007 peak, reached before the global financial crisis sparked alarm about bad loans on bank balance sheets.
Investors said banks still had challenges ahead.
"Even ignoring potential fines to the U.S., European banks still need to make loan-loss provisions. There is a lot further to go, especially if you compare them to U.S. banks," said Jonathan Bell, chief investment officer at Stanhope Capital.
The CAC 40 index of blue chip French shares fell 0.2 percent, underperforming a 0.1 percent dip on the pan-European FTSEurofirst 300 index, which had fallen to 1,377.46 points by the close.
BNP Paribas accounted for more than half the fall on the French index.
Germany's benchmark DAX index bucked the negative trend in several other national European bourses, staying flat after figures showed that German year-on-year retail sales grew at their strongest rate in April since June 2012 as Easter fell later this year than last.
The FTSEurofirst 300 posted a 1.8 percent gain for the month of May, which has taken it back up to 6-year highs.
Gains have been fuelled by building optimism over possible monetary policy easing at next week's crucial policy meeting of the European Central Bank.
Reuters reported this month that the ECB was preparing a package of policy options for its June 5 meeting that includes cuts in all its main interest rates.
However, trade could be cautious until the decision is made, with decisive policy action already priced in.
"Equities are near highs, and there's a lot of hope tied to the ECB, and greater chance of disappointment," James Butterfill, global equity strategist at Coutts, said.
"The equity market seems to be very optimistic, and it might be a bit of a let down."
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today's European research round-up [RCH/EUROPE (Additional reporting by Lionel Laurent and Atul Prakash; editing by Stephen Addison and Jane Merriman)