* FTSEurofirst 300 index falls 1.2 percent
* Portugal's PSI share index down 4.4 percent
* Banks top fallers; banking index down 2.7 percent
By Atul Prakash
LONDON, July 10 (Reuters) - European shares fell on Thursday as southern European indexes tumbled on weak data from Italy and growing concerns over the financial health of Portugal's largest listed bank.
The pan-European FTSEurofirst 300 index of top European shares hit a two-month low, dropping 1.2 percent to 1,346,72 points as of 1104 GMT, taking its losses since early this month to about 4 percent.
Portugal's PSI share index fell 4.4 percent, lagging all other European benchmarks after shares and bonds of Espirito Santo Financial Group, the chief shareholder in Banco Espirito Santo, were suspended over "material difficulties" at its parent firm ESI. Banco Espirito Santo shares dived 15.8 percent.
Italy's FTSE MIB fell 2.5 percent after data showed Italian industrial output posted its steepest monthly fall since November 2012 in May, casting doubts over the country's economic recovery.
"The BES situation is a tangled story of cross holdings and unexplained debts which has highlighted the risks that still exist in some European banks," said Lorne Baring, managing director of B Capital Wealth Management.
"There is some contagion effect in markets today. However, it may be an over-reaction to the BES news, which comes as Italian data showed a drop in production whereas the market expected a gain. Some investors may be questioning the strength of the peripheral Europe recovery after a strong market performance."
The market also came under pressure due to weaker Nordic stocks after disappointing updates from Norwegian bank DNB and Swedish construction firm Skanska.
Norway's largest bank posted lower-than-expected second-quarter results, partly due to higher loan losses, while Skanska said it would significantly scale down its loss-making Latin American operations after taking a charge in the second quarter. Their shares, down 4.4 percent and 2.4 percent, respectively.
All European equity sectors fell on Thursday. Banks led the decline, with the STOXX Europe 600 Banking Index dropping 2.7 percent to a seven-month low. Erste group fell 5.1 percent, while Banco Popular fell 5 percent.
The FTSEurofirst 300 hit a 6-1/2 year high last month but is now down for the fourth out of five sessions as a handful of disappointing earnings updates cast a shadow over the upcoming reporting season and raised questions about a nearly 10 percent rally between mid-March and last week.
"We were looking at an overextended market, so a degree of profit taking was inevitable," IG chief market strategist Brenda Kelly said.