* FTSEurofirst 300 ends down 0.7 pct after 7-1/2 yr high
* Peugeot falls as car sales growth lower than sector
* DAX underperforms as ZEW survey lower than expected
By Atul Prakash
LONDON, March 17 (Reuters) - European shares retreated from a 7-1/2-year high on Tuesday, with PSA Peugeot Citroen leading automakers lower after the release of car sales data and a disappointing German economic sentiment survey.
Germany's DAX, down 1.5 percent, underperformed the market after hitting a new record high on Monday. The pan-European FTSEurofirst 300 index ended 0.7 percent lower at 1,583.85 points, after setting a multi-year high of 1,598.03.
The STOXX Europe Automobiles and Parts index fell 2.5 percent, hit by a 5.9 percent fall in Peugeot after the automaker's vehicle sales rose less than the sector in February.
"The new car sales from Peugeot are disappointing. Peugeot underperformed the European auto market in February with an increase limited at 1.1 percent," a Paris-based trader said.
Data from the Association of European Carmakers (ACEA) showed new car registrations in Europe rose 7 percent in the month of February, fuelled by double-digit sales growth in Italy and Spain.
European shares fell further after the German ZEW think tank said its survey of economic sentiment increased to 54.8 in March from 53.0 in February, less than a Reuters forecast of 58.2. ZEW warned a lack of progress towards defusing the Greek and Ukraine crises was dampening sentiment.
"The ZEW survey reminds that the underlying story in Europe is still far from clear. There is plenty of risk in the region such as low inflation, a lack of coordinated reforms and uncertainty over Greece," Lorne Baring, managing director of B Capital Wealth Management, said.
"All of these could still give investors a scare in 2015."
Investors also traded cautiously ahead of the Federal Open Market Committee's two-day meeting starting on Tuesday. The U.S. central bank is expected to release late on Wednesday its statement and projections, which will be scrutinised for hints about the timing of an interest rate hike.
Some analysts stayed positive on the longer-term outlook. The FTSEurofirst 300 has risen about 15 percent this year as bond purchases from the European Central Banks drove yields on government debt to record lows, leading investors to seek higher returns in equities.
"European assets are in a powerful catch-up rally, which is not over," said Pascal Blanque, chief investment officer at Amundi, which has 850 billion euros ($902 billion) in assets under management.
"With the euro falling, the QE (quantitative easing) starting, the recent improvement in macro indicators, European assets are in a sweet spot. It could last for a while, as long as global growth remains above 3 percent."
Greek banks rose 1.4 percent, helped by a 9 percent rise in Bank of Piraeus on expectations that the Greek debt crisis will eventually get resolved. (Additional reporting by Alexandre Boksenbaum-Granier and Blaise Robinson in Paris and Francesco Canepa in London; Editing by Catherine Evans)