* FTSEurofirst down 0.3 percent, Euro STOXX 50 down 0.9 pct
* Weak China data casts shadow, weighs on miners
* Euro zone banks fall on Spanish rescue uncertainty
* Sell BBVA, buy Santander to cut Spanish risk - Berenberg
By Francesco Canepa
LONDON, Sept 20 (Reuters) - European shares fell in thin trade on Thursday as disappointing Chinese manufacturing data weighed on cyclical stocks and euro zone banks continued to retreat on uncertainty about if and when Spain would apply for a bailout.
Basic resources shares dropped 1.7 percent as data showed manufacturing activity in China, the world’s largest consumer of metals, continued to contract this month.
“What we haven’t seen is any acceleration, which we had hoped for by now,” said Dan Morris, global market strategist at JP Morgan Asset Management.
“Whatever stimulus has been put in place ... takes a while to kick in. I don’t think there is any reason to panic. It is a question of how much stimulus is needed to pick things up and I think there is still plenty of scope.”
For this reason, Morris maintained his preference for equities in emerging rather than developed markets. Within developed regions, he tipped U.S. shares over their European counterparts, citing better earnings and economic prospects on the other side of the Atlantic.
Euro zone data for September confirmed business conditions in the euro zone remained weak, with activity in the region’s service sector shrinking at its fastest pace since July 2009.
The reading weighed on the euro zone Euro STOXX 50 index, which was down 0.9 percent to 2,545.70 points by 1024 GMT.
The pan-European FTSEurofirst 300 index was down 0.3 percent at 1,113.23 points, having traded a mere 29 percent of its full-day volume average.
In the gloomy macro context, Imperial Tobacco was rewarded for its defensive qualities as it flagged an increase in revenue for the full year thanks to higher prices offsetting falling volumes.
Shares in the tobacco group rose 1.2 percent as trading volumes hit 71 percent of their average.
Euro zone banks dropped 1.7 percent, extending their retreat from a five-month highs hit last week, as Prime Minister Mariano Rajoy continued to hold back from applying for a bailout that would allow the European Central Bank to intervene on the debt market to tame Spain’s high borrowing costs.
Indices in crisis-struck southern Europe underperformed, with Spain’s Ibex 35 down 1 percent.
“Rajoy campaigned on a no-bailout ticket so don’t hold your breath for a bailout request until you see Spanish yields back in crisis territory or the banks or government run out of cash,” Marco Troiano, a banking analyst at Berenberg Bank, said.
“As to the banks, a funding crisis will probably be avoided, but deleveraging will drag on returns for years.”
Troiano advises playing this scenario by selling BBVA , which has 60 percent of its loan book in Spain, while owning Santander, which has only 30 percent of its loans in the country, to keep some exposure to an expected improved in sentiment.
Traders also said the recent rally in euro zone shares, which saw the index gain 20 percent in less than two months, could resume as soon as Spain applied for a bailout.