PARIS, April 27 (Reuters) - European stocks were set to drop on Friday, reversing a three-day tentative recovery rally after Standard & Poor's cut its credit rating on Spain by two notches, reviving worries over the debt-stricken country. S&P, citing expectations Spain's finances will deteriorate even more than previously thought due to the recession and the country's ailing banking sector, downgraded Spain to BBB-plus with a negative outlook, saying the situation could deteriorate further unless strong measures were taken at a European level. At 0638 GMT, futures for the Euro STOXX 50, for Germany's DAX and for France's CAC were down 0.5-1.1 percent. "We're expecting another strong wave in this euro zone debt crisis," Carmignac Gestion's Global Manager Frederic Leroux said. "The divergence between German policymakers and the rest of the euro zone is too big for a solution to emerge right now." The French asset management firm, which has about 50 billion euros ($66 billion) under management, has no French, Italian or Spanish debt in its portfolios. "We're not playing against Europe or France, we're just investing where the potential for growth is the strongest, and it's not in Europe," Leroux added. Spanish banks will be in the spotlight after Popular reported a 46 percent drop in first-quarter profit as it set aside provisions to cover for losses in bad property investments. Investors were also bracing for Italy's debt auction on Friday. The country is set to offer up to 6.25 billion euros in bonds, with borrowing costs expected to climb above 5.5 percent for the benchmark 10-year bond. It yielded 5.8 percent on Thursday, up from an auction level of 5.2 percent at the March sale. "Thursday's bill auction did nothing to reassure the markets, with yields soaring," Saxo Bank sales trader Alexandre Baradez said. "The LTRO boost is over. "The rally we had this week was purely a technical rebound. We're now back in a market driven by headlines and comments from political leaders." On Thursday, Italy paid the highest yield since January to sell six-month bills. The European Central Bank called on authorities to set up a body to manage bank rescues in the euro zone, marking the central bank's strongest intervention yet in the debate on whether the costs of bailing out troubled banks should be shared. The euro zone's blue-chip Euro STOXX 50 index has lost 11 percent over the past six weeks, while Spain's IBEX has dropped nearly 20 percent. -------------------------------------------------------------------------------- MARKET SNAPSHOT AT 0640 GMT LAST PCT CHG NET CHG S&P 500 1,399.98 0.67 % 9.29 NIKKEI 9,520.89 -0.43 % -40.94 MSCI ASIA EX-JP 514.61 0.08 % 0.40 EUR/USD 1.3171 -0.12 % -0.0016 USD/JPY 80.72 -0.38 % -0.3100 10-YR US TSY YLD 1.893 -- -0.05 10-YR BUND YLD 1.653 -- -0.03 SPOT GOLD $1,652.40 -0.29 % -$4.88 US CRUDE $103.96 -0.56 % -0.59 GLOBAL MARKETS-Shares inch up, Spain debt downgrade caps US STOCKS-Housing, profits lift Wall St, Amazon up late Nikkei up after BOJ eases monetary policy FOREX-Euro stung by Spain downgrade, yen looks to BOJ TREASURIES-US bonds rise after S&P downgrades Spain Gold inches down after Spain downgrade; dollar weighs Brent slips, Spain downgrade revives euro zone woes LME copper snaps 3-day rise after Spain downgrade COMPANY NEWS: POPULAR The Spanish bank reported a 46 percent drop in first quarter profit on Friday after it set aside provisions to cover for losses in bad property investments. TOTAL French oil group Total posted a 1 percent decline in first-quarter adjusted net income on Friday due to tough refining and chemicals activities and as production of oil and gas remained flat. DAIMLER The German automotive group reported a surprise increase in first-quarter operating profit on Friday, in part thanks to stronger-than-expected earnings at its financial services business. SANOFI French drugmaker Sanofi confirmed that earnings could decline by up to 15 percent this year as top-selling drugs previously protected by patents, including blood thinner Plavix, are hit by competition from cheap copies. BASF The world's largest chemicals maker reported better-than-expected first-quarter operating earnings, boosted by its oil and gas division and on higher sales of liquid chemicals. NOBEL BIOCARE Swiss dental implant maker Nobel Biocare on Friday posted first-quarter net profit of 13.7 million euros, outstripping the 12.5 million euros forecast by analysts in a Reuters' poll. NOVARTIS U.S. health regulators approved on Thursday Novartis AG's Afinitor for the treatment of non-cancerous kidney tumors in patients with a rare genetic disease known as tuberous sclerosis complex. DEUTSCHE BANK, BARCLAYS Barclays and Deutsche Bank on Thursday won a fierce bidding war for a portfolio of toxic assets the US government acquired in the 2008 bailout of insurance giant AIG. DEUTSCHE BOERSE Deutsche Boerse AG's first-quarter earnings before interest and taxes fell 19 percent to 260 million euros ($344 million), hit by a charge for the failed takeover of NYSE Euronext. REPSOL GAS NATURAL Spanish oil major Repsol is considering a merger with gas and electricity group Gas Natural to prevent a takeover bid or the sale of its 30 percent stake to buy a medium-sized oil firm such as Galp, Cinco Dias reported, citing unnamed sources. FONDIARIA-SAI, UNIPOL, PREMAFIN, MILANO ASSICURAZIONI Italy's Antitrust authority has opened an investigation into the planned merger between Unipol and Fondiaria-SAI and suspended the operation until the end of the probe, which will last up to 75 days. Fondiaria also said in a statement on Thursday the board had named Cosimo Rucellai had been appointed as the new chairman. DSV Danish freight forwarder DSV A/S reported a smaller-than-expected rise in core profits for the first quarter, held back by lower revenue in its Air & Sea division due to falling freight rates and volumes. OUTOKUMPU Finnish stainless steel maker reported a fall in first-quarter profit and forecast its second-quarter operational results would be negative or break-even due to cheaper nickel. WPP The world's largest advertising group, nudged its full-year outlook higher on Friday after strong growth in Asia Pacific and Latin America got the group off to a solid start to 2012. AREVA The world's biggest maker of nuclear plants posted a 2.4 percent increase in first-quarter revenue as growth in reactor services more than offset a decline in its uraniam transformation business.