* FTSEurofirst 300 falls 0.5 pct after 4 sessions of gains
* Financials down; Italian banks fall on capital hike news
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By Atul Prakash
LONDON, March 29 (Reuters) - European shares retreated in morning trade on Tuesday, led lower by financials, with Italian lenders sharply down after UBI Banca's surprise announcement of a 1 billion euros ($1.4 billion) capital hike.
Analysts said there were concerns that other banks might follow suit, while investors also stayed cautious ahead of the results of stress tests on Irish banks, due on Thursday.
At 0955 GMT, the FTSEurofirst 300 index of top European shares was down 0.5 percent at 1,119.54 points. Banks were the top decliners, with the European sector index down 1.1 percent, UBI Banca falling 9.7 percent and Banca Popolare Di Milano down 6.2 percent.
"We are still very cautious on the banking sector as a whole. Italian banks do look somewhat under-capitalised and as we have seen lately, there are a lot of moves to boost banks' capital to avoid a repeat of the crisis," said Felicity Smith, fund manager at Bedlam Asset Management.
"The big problem is that they need to hold more capital and that means in future, even if the economy grows, the returns they generate would be lower." Bedlam manages $700 million.
UBI Banca announced late on Monday a capital hike aimed at boosting its core Tier 1 capital ratio to 8.01 percent, based on an end-2010 simulation, ahead of Basel III rules on banks' capital and another EU stress test.
"The banking sector is still vulnerable to the euro zone debt crisis and the Irish banking system is under severe pressure," said Tammo Greetfeld, equity strategist at UniCredit.
"If the stress tests of the Irish banks reveal that capital requirements substantially increase previous estimates then it would cast doubts about the ability of the officials to correctly assess the health of banks and their potential capital needs."
STRESS TESTS
Ireland is conducting fresh stress tests on all its banks as part of an EU-IMF bailout and will publish the results on Thursday at 1630 GMT. Under the tests, all lenders will have to have a minimum core Tier 1 ratio of 10.5 percent.
Irish shares were down 0.7 percent, while Britain's FTSE 100 , Germany's DAX and France's CAC 40 fell 0.2 to 0.4 percent. The Thomson Reuters Peripheral Eurozone Countries Index was down 0.8 percent.
Greetfeld said he was underweight banks and expected them to continue to underperform the broader equity market. UniCredit is overweight sectors such as utilities, telecom and healthcare.
Smith said she had seen a lot of flows into mining stocks in the past days, while the market also witnessed some flows out of oils as people have become sanguine about the Libyan situation.
Miners gained, with the sector index up 0.5 percent and Vedanta gaining 1.5 percent. On the other hand, the STOXX Europe 600 Oil & Gas index fell 0.8 percent.
Volumes on Euro STOXX 50 options were down more than 50 percent from its 20-day daily average to 700,000 lots on Monday, signaling perceived lower risk premium, Nick Tranter, head of derivatives at Espirito Santo, said.
Some analysts remained positive and said investors will focus on economic numbers for direction.
"Despite a backdrop of concerns, investors have been trying to focus on the economic data. The weekly U.S. jobless figures have not been too bad over the last couple of weeks and there is some optimism that this Friday's report will be good," said Keith Bowman, analyst at Hargreaves Lansdown. (Additional reporting by Dominic Lau; editing by Elaine Hardcastle)