* FTSEurofirst 300 down 0.5 pct after hitting 3-month low
* Greek debt concerns lowers investors' risk appetite
* Retailers, automakers feature among top decliners
By Atul Prakash
LONDON, June 17 (Reuters) - European shares hit a new three-month low on Friday and headed for a seventh straight week of losses on political upheaval in Greece and as concerns grew the euro zone country would struggle to avoid a debt default.
Shares, however, pared losses on market speculation that a new bailout package for Greece had been agreed.
Risk appetite of equity investors dropped, as the Euro STOXX 50 volatility index was up 5.6 percent after rising to its highest level in three months. The index has jumped about 25 percent in four days on jitters over the Greek debt crisis.
Greek Prime Minister George Papandreou appointed a new finance minister on Friday in a reshuffle to muster support for harsh economic reforms that have stoked violent unrest and split his ruling party.
At 0959 GMT, the FTSEurofirst 300 index of top European shares was down 0.5 percent at 1,078.56 points after falling as low as 1,072.34, the lowest since mid-March. It fell 0.4 percent in the previous session and dropped 1.1 percent on Wednesday.
The index is down 0.9 percent so far this week, and is on track to match its longest run of weekly declines, last seen in January 2008, on lingering worries that Greece's debt crisis might spill over.
"The whole austerity issue is going to be around for a long time, but what we are trying to avoid here is contagion risk and liquidity crunch. That's the primary concern for the markets right now," said Graham Bishop, equity strategist at RBS.
"Near term, we have got much more defensive bias in our portfolios. We are speaking more cautiously about cyclicals."
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Bank exposure latest breakdown http://r.reuters.com/max89r
EU banks CDS http://r.reuters.com/zat22s
Euro zone banks price to book value
http://r.reuters.com/vat22s
Return on Euro zone bonds http://r.reuters.com/fet99r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
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Analysts said the reforms were a condition for Greece to receive an international bailout to save it from a debt default that could unleash global economic turmoil. The cost of insuring Greek debt against default hit a fresh record high above 2,000 basis points on Friday.
"I think politics is playing a dirty game. The uncertainty is about whether politicians, the European Central Bank and the International Monetary Fund will agree on something for Greece or not," said Hendrik Leber, managing partner of ACATIS Investment, which manages 1.2 billion euros ($1.70 billion).
Leber saw a 20 percent chance of a Greek debt default this year, but also added that Friday might be a low point for stocks as the market could see some positive steps towards a solution of the Greek debt problem.
ACATIS was planning to buy Greek banks on hopes that the sector, which has fallen 26 percent this year, would bounce back. Greek banks rose 2.3 percent after slipping about 6 percent in the past two sessions. Greek shares were up 1.9 percent on the news of the cabinet reshuffle.
European banks , however, stayed weak, with the sector index down 0.5 percent. It has fallen more than 7 percent this month.
Automobile shares also lost ground, with the sector index falling 0.6 percent. Fiat , down 2.1 percent, led the sector down as its unit Chrysler Group recalled 11,351 vehicles for a possible missing or incorrectly installed part.
French retailer Carefour fell 2.5 percent after providing details of a profit warning issued on Thursday on the first-half performance of its French operations saying it expected a drop of around 35 percent in operating income.
The STOXX Europe retail index fell 0.5 percent. (Graphics by Scott Barber; Editing by Hans-Juergen Peters)
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