* FTSEurofirst 300 down 0.6 percent, halts 2-week rally
* Banking stocks fall, extend year's losses to 9 percent
* Fear-gauge VDAX-NEW volatility index rises 4 percent
* While DAX up 17 percent in 2010, IBEX loses 16 percent ytd
* For up-to-the-minute market news, click on
By Blaise Robinson
PARIS, Dec 15 (Reuters) - European stocks lost ground on Wednesday, halting a brisk two-week rally after Moody's put Spain on review for a possible downgrade, reviving euro-zone debt jitters and dragging down the euro.
The STOXX banking sector index, down nearly 9 percent on the year, took another beating on Wednesday, falling 2.1 percent, with Banco Santander losing 3.4 percent, UniCredit falling 3.1 percent, Barclays dropping 2.8 percent and Credit Agricole falling 2.5 percent.
At 1200 GMT, the FTSEurofirst 300 index of top European shares was down 0.6 percent at 1,126.712 points. The index, which had gained 6.5 percent in two weeks, is up 7.7 percent so far in 2010.
"Europe remains very fragile. Everyone sees a major crisis in the first few months of 2011 that would coincide with Spain's refinancing operations," said Arnaud Poutier, deputy head of IG Markets France.
"The debt market is not closed for Spain, but the rise in rates has been very strong. The risk is essentially coming from the Spanish banks," he said.
Moody's put Spain on review for a possible downgrade on Wednesday, underscoring worries over a looming funding crunch next year, though the ratings agency said it did not expect Madrid to have to resort to a European Union bailout as Greece and Ireland have.
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Graphic showing euro zone credit ratings and spreads:
http://r.reuters.com/get52k
Equity, bond returns in 2010: http://r.reuters.com/cyg32r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ up 8 basis points at 5.63 percent, widening the spread over German benchmark Bunds to 260 basis points.
Risk aversion was on the rise, with the VDAX-NEW volatility index, one of Europe's main barometers of investor anxiety, up 4 percent.
Spain's IBEX 35 benchmark index was down 2 percent on Wednesday, while Portugal's PSI 20 was down 0.9 percent and Italy's FTSE MIB down 1.6 percent.
The Peripheral Eurozone Countries Index dropped 2.3 percent.
While Germany's DAX index is up 17 percent so far this year and the UK's FTSE 100 index is up 8.4 percent, France's CAC 40 is down 1.7 percent, Portugal's PSI 20 is down 6.8 percent, Italy's FTSE MIB is down 12 percent, and Spain's IBEX is down 16 percent.
Investors were also rattled by the Federal Reserve's cautious assessment of the strength of the economic recovery late on Tuesday, saying it was still too slow to bring down unemployment.
"We've been in a misplaced euphoria of a year-end rally, but watch out for the hangover that will follow," said Marc Gilson, head of Paris-based fund manager Fival.
"Even if valuation tools show stocks as cheap, that doesn't mean equities is the place to be. We shouldn't forget that stocks will be hit by every slip-up from States."
Despite the recent rally, European equities suffered outflows in the last four weeks, though Germany bucked the trend with relatively strong inflows, enjoying a weaker euro, according to a study by Societe Generale Cross Asset Research.
Among the few stocks on the upside on Wednesday, Novartis AG rose 6.7 percent after wrapping up its long-awaited buyout of the remainder of U.S.-listed Alcon Inc for $12.9 billion, after sweetening its original offer with a cash element. (Reporting by Blaise Robinson; Editing by Will Waterman)