* Concerns over Portuguese banks hits Lisbon market
* ECB keeps rates at record lows
* Ukraine/Russia sanctions keep stock markets on back foot
By Sudip Kar-Gupta
LONDON, Aug 7 Concerns about Portugal's banking system hit the Lisbon market on Thursday and weighed on European shares, which were also kept in check by tensions between Western powers and Russia.
The European Central Bank kept its main interest rate at a record low 0.15 percent, but the decision was widely expected by investors and did not move equity markets.
Lisbon's benchmark PSI-20 index was down 1 percent, underperforming smaller losses on other European stock markets.
Traders said the Lisbon market was hurt by fears over the state rescue of Portuguese bank Banco Espirito Santo (BES) , which was hit by financial problems associated with its Espirito Santo founding family.
Investors are concerned that lenders who contribute to a bank recapitalisation fund, through which the state injected 4.9 billion euros ($6.5 billion) to carve out a healthy new bank out of BES, may end up paying a chunk of the rescue bill.
"The prevailing sentiment in Portugal's stock market is gloomy. The negative sentiment towards the banks in general is shared not only by investors but also by the public at large," ActivTrades analyst Ricardo Evangelista said.
BACKDROP OF ECB SUPPORT
European stock markets were also pegged back by tensions between Western powers and Russia, with the pan-European FTSEurofirst 300 index trading flat at 1,323.08 points.
Russia imposed a one-year ban on Thursday on all meat, fish, dairy, fruit and vegetables imports from the United States, the European Union, Canada, Australia and Norway, escalating the economic battle with the West set off by the crisis in Ukraine.
Many German companies, such as Adidas, have significant business interests in Russia and could therefore be affected by sanctions.
Germany's main DAX equity index was flat, close to a near five-month low hit on Wednesday as the DAX continued to retreat from a record high reached in late June.
HED Capital managing director Richard Edwards expected the DAX to soon bounce back from those lows, however, with European stock markets still supported by economic stimulus measures from the European Central Bank.
ECB President Mario Draghi reiterated on Thursday that the ECB still had the option of using "quantitative easing" (QE) - a means of injecting more liquidity into markets by buying assets such as government bonds, to help the overall economy.
Dan Ison, European equities fund manager at Threadneedle Investments, said the backdrop of support from the ECB, along with better corporate profits and more merger and acquisition activity, would support European stock markets going forward.
"Companies in Europe outside of the financial sector have strong balance sheets and cash flow, leading to the prospect of further dividend growth, cash returns and merger and acquisition activity," he said.
(1 US dollar = 0.7495 euro)
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 Blaise Robinson; Editing by Catherine Evans)