* FTSEurofirst 300 down 0.5 percent
* UBI Banca falls on capital hike; peripheral banks lower
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By Harpreet Bhal
LONDON, March 29 (Reuters) - Falls in peripheral banks led European shares lower on Tuesday after Italian lender UBI Banca announced a capital hike, though analysts said the deal could help restore longer-term confidence in the sector.
Italian banks were heavy fallers, with the Thomson Reuters Peripheral Banking index down 2.2 percent after UBI Banca's 1 billion euro capital increase took investors by surprise and prompted speculation peers could be heading down the same route.
By 1051 GMT, the pan-European FTSEurofirst 300 index of top shares was 0.5 percent lower at 1,119.36 points, with Italy's FTSE MIB and Ireland's ISEQ down 1.4 and 0.8 percent respectively.
Analysts said that although the capital increase was being perceived negatively by the market, the move could boost share prices in the longer-term as it restores confidence that the sector will be able to meet tough new capital requirements.
Upcoming Basel III rules on banks' capital and another stress test this year in Europe have been putting pressure on banks to shore up capital to prevent a repeat of the funding crises that impacted lenders during the financial crisis.
"In the longer-term it's a positive thing and could give shareholders confidence that the banks are trying to get their house in order but in the near term you typically would see a knee-jerk reaction," said Joshua Raymond, market strategist at City Index.
Analysts at Nomura said it expects UBI Banca's capital increase announcement to have a negative read-across for the sector, and downgraded its rating on the lender to "reduce" from "neutral"
"Market pressure for smaller banks in Italy will likely mount," Nomura analysts wrote in a note.
"We would say the read-across is less intuitive for large banks like Intesa Sanpaolo and Unicredit although the capital bar is increasing."
UBI Banca shed 9.8 percent, while Intesa Sanpaolo and UniCredit both fell around 3.5 percent.
RANGEBOUND TRADING
The FTSEurofirst 300 index has been trading between a range of 1,118.51 and 1,127.94 points in the past three sessions, following hefty gains in the previous week, with investors awaiting confirmation of improving economic fundamentals from key economic data such as the U.S. non farm payrolls due later in the week.
The index rose 3.3 percent last week, snapping four straight weeks of falls.
"We're expecting another strong payrolls number on Friday, but we're in a consolidation mode after charging higher so quickly last week," said a London-based trader, who expects the economy to show an addition of 200,000 jobs, after 192,000 in the previous month.
Brightening prospects for the U.S. economy has fuelled expectations that the Federal Reserve could bring forward monetary tightening, with Fed member James Bullard saying that waiting too long to tighten policy could produce "a lot of inflation."
Some worries over the impact of higher energy prices on global inflation eased as crude prices retreated for the third straight session as Libyan rebels made advances against government troops
The European energy sector, however, was dragged lower by a 2.5 percent fall in heavyweight BP after a rating downgrade by Collins Stewart and on reports that the company may face manslaughter charges over its Gulf of Mexico spill. (Editing by Jon Loades-Carter)