* FTSEurofirst 300 down 0.3 percent
* Banks under pressure; Italian banks fall sharply
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By Atul Prakash
LONDON, March 29 (Reuters) - European shares dropped on Tuesday, led lower by financials, with Italian banks under pressure following UBI Banca's announcement of a 1 billion euro ($1.4 billion) capital increase.
Analysts said there were concerns other banks might follow suit, while investors were also awaiting results of stress tests on Irish banks, due on Thursday.
At 0903 GMT, the FTSEurofirst 300 index of top European shares was down 0.3 percent at 1,122.48 points.
Banks were the top decliners, with the European sector index down 0.6 percent, UBI Banca falling 9.1 percent and Banca Popolare Di Milano down 5.5 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 about $700 million.
UBI Banca announced a capital hike late on Monday 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."
Greetfeld said he was underweight banks and expected them to continue to underperform the broader equity market. UniCredit is overweight defensive sectors such as utilities, telecom and healthcare.
Miners were among the top gainers, with the sector index up 0.6 percent and Vedanta gaining 2 percent. (Editing by Hans Peters)