* FTSEurofirst 300 index falls 1 percent
* Portugal's PSI share index down 4 percent
* European banking index slips
By Atul Prakash
LONDON, July 10 (Reuters) - Investors across Europe trimmed their exposure to banks on Thursday in response to concerns about the health of Portugal's biggest listed bank.
Portugal's PSI share index fell 4.1 percent to a nine-month low, lagging all other European benchmarks after shares and bonds of Espirito Santo Financial Group, the chief shareholder in Banco Espirito Santo, were suspended over "material difficulties" at its parent firm ESI.
Trading in Banco Espirito Santo was also later halted after a 19 percent drop. The broader pan-European FTSEurofirst 300 index hit a two-month low and provisionally closed 0.95 percent lower at 1,350.56 points, taking its losses since early this month to about 4 percent.
The STOXX Europe 600 Banking Index dropped 1.3 percent to a seven-month low.
"The risk of contagion is clearly visible in the markets today as the market fears that there is more to come," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
"I would treat it as an isolated case at the moment, but I would not be a buyer today and tomorrow as I think this can be a story for a while."
With concerns about the country's financial sector pushing Portugal's 10-year bond yields above 4 percent, the troubles have begun to revive memories of the country's debt crisis, when it was forced to seek a bailout in 2011.
Portugal exited the bailout last month but still has 6 billion euros in available funding for the banking sector.
"The BES situation is a tangled story of cross holdings and unexplained debts which has highlighted the risks that still exist in some European banks," said Lorne Baring, managing director of B Capital Wealth Management.
"There is some contagion effect in markets today. However, it may be an over-reaction to the BES news, which comes as Italian data showed a drop in production whereas the market expected a gain. Some investors may be questioning the strength of the peripheral Europe recovery after a strong market performance."
Other European markets were also under pressure. Italy's FTSE MIB fell 1.4 percent after data showed Italian industrial output posted its steepest monthly fall since November 2012 in May, casting doubts over the country's economic recovery.
Most of the European equity sectors were down on Thursday.
On the positive side, luxury group Burberry rose 3.3 percent, the leading FTSEurofirst 300 gainer, after posting a 12 percent rise in like-for-like retail sales for its fiscal first quarter to June 30.
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 Francesco Canepa; Editing by Mark Trevelyan)