* Lisbon's PSI 20 sinks 2.1 pct on Espirito Santo family debt worries
* FTSEurofirst 300 flat, Euro STOXX 50 up 0.6 pct
* Sodexo hit after poor update (Updates prices at settle)
By Francesco Canepa
LONDON, July 9 Portuguese shares fell on Wednesday, underperforming other European equity markets as they were hit by concerns about the health of one of the country's largest financial groups.
Pan-European indexes were broadly flat to slightly higher.
Lisbon's PSI index dropped 2.1 percent, led by an 11 percent plunge in Espirito Santo Financial Group. It is the top shareholder in Portugal's largest listed bank by assets, Banco Espirito Santo (BES), whose shares dropped 4.7 percent.
The family behind BES is said to be considering debt-for-equity swaps as it grapples with financial problems at its holding companies, casting a shadow on the wider Portuguese financial sector and triggering a spike in Lisbon's sovereign bond yields.
The PSI, which has risen 24 percent in the past 12 months, has underperformed other European markets since concerns surrounding Espirito Santo arose last month and also after the release of some disappointing economic data last month.
"Investors are starting to wake up to this bad coffee," Franz Wenzel, chief strategist at AXA Investment Managers, said. "Also they've made fairly decent returns (on Portuguese shares) so why not take profit and take some shelter."
Shares in Portugal Telecom also hit a record low and were down 5.5 percent on lingering concerns over its 897 million euro ($1.22 billion) investment in another Espirito Santo holding company, traders said.
Trading volume on Portugal Telecom and BES was more than three times their full-day averages for the past three months on a relatively quiet day for European equity markets.
Activity on the pan-European FTSEurofirst 300 index was 15 percent lower than its own average.
The index, which hit a 6-1/2 year high in late June, ended the day flat at 1,363.46 points.
The euro zone's blue-chip Euro STOXX 50 index rose 0.6 percent, recovering some ground after a 3.2 percent fall over the previous three sessions.
A disappointing trading update from French caterer Sodexo , coming hard on the heels of a profit warning from Air France-KLM on Tuesday, fuelled concerns about weak corporate earnings ahead of the second-quarter reporting season.
Sodexo shares fell 1.8 percent after the group said its fourth quarter would be weaker than expected due to the delayed start-up of some major contracts. The group cut its full-year sales growth goal.
"There are some worries that some company results may not be as strong as expected," said Berkeley Futures associate director Richard Griffiths. ($1 = 0.5877 British pounds) (Additional reporting by Andrew Winterbottom and Sudip Kar-Gupta; Editing by Susan Fenton)
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