* FTSEurofirst 300 closes down 0.9 pct at 1,381.64 points
* Stock markets slip after weak German economic data
* Total, Sanofi fall after cautioning over results
* Banco Espirito Santo falls 5.2 pct
* Thin trading volumes on exchanges
By Sudip Kar-Gupta
LONDON, July 7 European stock markets retreated on Monday after weak German economic data took the wind out of a rally that had pushed a leading regional index back towards 6-1/2 year highs.
Portuguese bank Banco Espirito Santo was among the region's worst-performing stocks.
BES fell 5.2 percent as investors highlighted the difficulty facing the bank's new chief executive - Vitor Bento - in having to explain how Portugal's biggest bank will recover nearly a billion euros lent to family-controlled firms.
Some analysts said the European stock market could flatline in the near term although the longer-term outlook remained positive given the steps taken by the European Central Bank to boost the region's economy.
The pan-European FTSEurofirst 300 index, which hit a 6-1/2 year high of 1,399.62 points in June, closed down by 0.9 percent at 1,381.64 points.
Volumes were thin, coming in at just 58 percent of the index's 3-month daily average.
The euro zone's blue-chip Euro STOXX 50 index fell 1.2 percent to 3,230.92 points, while Germany's DAX - which hit a record high in June - weakened by 1 percent to 9,906.07 points.
European stock markets fell after German industrial output declined by 1.8 percent on the month in May, its biggest drop in more than two years, confounding expectations of unchanged industrial output in Europe's powerhouse.
Central Markets' trading analyst Joe Neighbour expected that the weak data would contribute to the DAX staying below the 10,000 point level in the next few weeks.
James Butterfill, global equity strategist at Coutts, said that data showed that Europe's gradual economic recovery remained a patchy one.
"It rings alarm bells across Europe that the recovery is not a straight line upwards," Butterfill said.
TOTAL AND SANOFI SLIP
A fall in the shares of heavyweight stocks Total and Sanofi also pegged back European markets.
French oil major Total fell 2 percent after it said its margins would be affected by a weak performance of its refining business. French pharmaceuticals group Sanofi also declined by 1.2 percent after it said adverse foreign exchange movements would affect its earnings.
But in spite of the pullback, many traders expected European stocks to rally later this year, helped by the ECB's support for the euro zone economy.
Last month, the ECB cut interest rates to a record low and last week ECB head Mario Draghi kept open the option of creating money, if needed.
"The near-term still looks positive. Mario Draghi's speech last week is still keeping a risk-on scenario," Carlo Alberto de Casa, senior market analyst at online brokerage ActivTrades, said.
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today's European research round-up (Additional reporting by Alistair Smout. Editing by Jane Merriman)