* FTSEurofirst 300 down 1 pct, Euro STOXX 50 down 0.7 pct
* Payrolls increase 209,000 in July, less than expected
* Investors rattled by Argentina's default, Russian sanctions
* Banco Espirito Santo stock sinks 19 pct
By Blaise Robinson
PARIS, Aug 1 (Reuters) - European shares slightly trimmed losses on Friday after data showing U.S. job growth slowed more than expected last month, soothing concerns of an early interest rate hike.
But stocks remained deep in negative territory, with a broad index trading at 3-1/2 month lows, hurt by tension between Russia and the West, Argentina's default, as well as concerns around losses at Banco Espirito Santo.
The Labor Department said on Friday nonfarm payrolls increased 209,000 last month after surging by 298,000 in June, missing economists' expectation of an increase of 233,000 jobs.
"The number was a fairly big miss, but it means the Americans may hold off a little bit longer from raising rates," said Joe Neighbour, trading analyst at London-based firm Central Markets.
While encouraging for the global economy at large, the prospect of strong job numbers had fuelled expectations the Fed would raise rates soon. The U.S. central bank's ultra-loose monetary policy has helped drive a two-year rally in equity markets, with the FTSEurofirst 300 up 45 percent since mid-2012, before this week's sell-off.
The sharp rally has propelled European stocks to valuation levels not seen since 2005, with the broad STOXX Europe 600 trading at 13.9 times expected earnings in the next 12 months, according to Thomson Reuters data. This compares with a price-to-earnings ratio of 15.7 for Wall Street's S&P 500 .
By 1345 GMT, the FTSEurofirst 300 index of top European shares was down 1 percent at 1,337.06 points. The index was down 1.3 percent to a level not seen since mid-April shortly before the data was released.
The euro zone's blue-chip Euro STOXX 50 index was down 0.7 percent at 3,093.17 points, while Germany's DAX was down 1.6 percent.
Technical charts sent a strong negative signal on the DAX, with the index breaking below its 200-day moving average for the first time in two years.
Investors have been worrying about the impact of sanctions against Russia. This week, the European Union and the United States targeted its energy, banking and defence sectors in the strongest international action yet over Moscow's support for rebels in eastern Ukraine.
About 40 European blue-chips, including many German companies, derive more than 5 percent of their revenues from the Russian market.
Adding to investors' concerns, data showed on Friday euro zone manufacturing growth failed to accelerate as expected last month despite factories barely raising prices, as growing tensions in Ukraine weighed on sentiment.
Spanish stocks also underperformed again on Friday, with Madrid's IBEX dropping 1.4 percent, as traders cited worries over Spanish companies' exposure to Latin America.
Argentina defaulted on Thursday for the second time in 12 years following the collapse of last-ditch talks with holdout creditors, raising worries over the outlook for Latin America's No. 3 economy.
In Portugal, shares in Banco Espirito Santo shed 19 percent, adding to its 42-percent drop on Thursday when the bank posted a 3.6 billion euro loss and higher-than-expected provisions to cover its exposure to companies owned by its founding Espirito Santo family.
Shares in France's Credit Agricole, which holds a significant stake in the bank, have lost nearly 5 percent this week.
The massive loss at the Portuguese bank has dragged Europe's banking sector index down 2.1 percent this week, reviving concerns over the sector, particularly in Southern Europe, hit hard by the years-long sovereign debt crisis.
Among the top losers on Friday, shares in ArcelorMittal , the world's largest steelmaker, sank 4.7 percent after cutting its forecast for earnings this year.
French telecom group Iliad dropped 7.8 percent after making an offer for T-Mobile US Inc that set up a potential bidding war with Sprint Corp.
Bucking the trend, Europe's No. 2 insurer AXA, rose 2.7 percent after reporting a better-than-expected first-half net profit.
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 Sudip Kar-Gupta in London; Editing by Alison Williams)