* FTSEurofirst 300 index falls 0.2 percent
* easyJet falls on rating downgrade
* Banco Popolare falls on report on bad debt unit
By Atul Prakash
LONDON, June 30 (Reuters) - European shares edged lower in choppy trading on Monday, with easyJet leading the travel and leisure sector lower following a downgrade by a major investment bank and Banco Popolare putting pressure on the banking sector.
The European travel and leisure index fell 0.8 percent, pressured by easyJet. Shares in the budget airline slumped 5.8 percent, the top faller on the pan-European FTSEurofirst 300, with traders citing a rating cut by Bank of America Merrill Lynch to "underperform" from "neutral".
And Italy's fourth-biggest lender Banco Popolare fell 4.2 percent after its CEO Pier Francesco Saviotti told a newspaper the bank has cancelled the sale of its bad debt unit for now and it will look at merger opportunities once it has passed a Europe-wide health check of the sector.
"The market doesn't like this kind of news ahead of the upcoming stress test. If a bank is not able to find a buyer at the desired price, this leaves investors guessing about the quality of assets and whether further writedowns are necessary," Gerhard Schwarz, head of equity strategy at Baader Bank, said.
"The banking sector in general suffers from the lack of cyclical appetite investors currently have. The recent somewhat weaker economic numbers in Europe also cast some doubts that this recovery has a strong momentum. Banks are still suffering from structural weakness in their profitability."
The European banking index was down 1 percent, the biggest sectoral decliner in Europe. Banks also put pressure on the FTSEurofirst 300 index, which was down 0.2 percent at 1,368.20 points by 1149 GMT after edging higher in early trading, supported by Philips.
The Dutch conglomerate rose 2.4 percent after saying it will merge its Lumileds LED components and automotive lighting divisions into a standalone subsidiary that could potentially be spun off.
"Investors are pleased about Philips' decision to spin off the lighting business by the first half of 2015 as it unlocks value for shareholders in the large and complicated group whose activities range from healthcare equipment and lighting to consumer lifestyle products," Peter Garnry, head of equity strategy at Saxo Bank, said.
European stocks have risen sharply since mid-March, boosted by expectations of support from new stimulus measures from the European Central Bank (ECB), but retreated last week after downbeat U.S. growth data and worries over violence in Iraq.
Last week was also marked by investment outflows, with European equity funds seeing redemptions of $1.6 billion, their biggest outflows in over a year, according to data from BofA Merrill Lynch Global Research.
But despite the week's pull-back, investors remain positive on the longer-term. A Reuters poll released last week showed that investors are bullish on the outlook for European shares in the second half of the year, betting on them extending their rally, helped by the ECB's stimulus measures.
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today's European research round-up (Additional reporting by Blaise Robinson in Paris; Editing by Toby Chopra)