(Updates prices at settle)
* FTSEurofirst 300 falls 1.5 pct to lowest level since Aug
* Worries over economic outlook as IMF cuts forecast
* German data disappoints
* Rio jumps after rejects merger approach by Glencore
By Liisa Tuhkanen and Francesco Canepa
LONDON, Oct 7 (Reuters) - A key European equity index dropped to a 1 1/2-month low on Tuesday as the International Monetary Fund cut its growth estimates for the euro zone's three largest economies and German industrial output data disappointed.
Market bets on a European economic recovery faded as the IMF downgraded its forecasts for Germany, France and Italy. Meanwhile, Germany reported its biggest drop in industrial production since the financial crisis in early 2009.
The FTSEurofirst 300 index of top European shares ended 1.5 percent lower at 1,329.76 points, its lowest level since Aug. 18. All sectoral constituents of the STOXX Europe 600 index closed lower.
The FTSEurofirst has fallen 5.8 percent since hitting a 6 1/2-year high in September, rattled by some poor euro zone data, disappointment at the European Central Bank's recent stimulus action and the prospect of a tightening in U.S. monetary policy.
"I suspect that the market ... is anticipating recovery in the euro zone economy, but to me that's not going to happen," John Clarke, chief investment officer at GHC Capital Markets, said.
The worsening economic picture left bullish investors pinning their hopes on the ECB, which cut its interest rate to a record low and announced plans to buy asset-back securities - bundles of debt - and covered bonds last month.
"At the moment we have maintained a small array of euro zone equities and we are holding on to that," said Wouter Sturkenboom, investment strategist at Russell Investments.
"Unless things deteriorate from here we would keep that, because we think that the stimulatory ECB policy is going to allow the euro zone to maintain its trend growth."
Miner Rio Tinto surged 2.2 percent after rejecting a merger approach by Glencore, although Rio's shares came off their intra-day high after Glencore said it was no longer considering a bid for the rival.
Glencore's stock fell 2.4 percent.
News of the approach rekindled speculation about consolidation in the mining industry, helping shares in Anglo American rise 2 percent.
The STOXX basic resources sector index, down 0.5 percent on Tuesday, has lost 12 percent since late July, hurt by a slump in metal prices such as iron ore.
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 Jon Boyle)