* FTSEurofirst 300 down 3.3 percent
* ECB cuts deposit rate in line with expectations
* Asset purchases extended but not increased
* Investors disappointed with limited new measures (Recasts, adds details, quotes)
By Alistair Smout
LONDON, Dec 3 (Reuters) - Top European shares saw their biggest fall in 4 months on Thursday, with a recent rally to 3-month highs sunk by a European Central Bank policy update which fell well short of high hopes for extreme dovishness.
A cut in deposit rate was only in-line with expectations, sending stocks into negative territory, and falls accelerated in afternoon trade after ECB President Mario Draghi's news conference.
While he announced that the ECB's asset purchase programme would be extended, he did not increase the size of the programme, and bets that there might be further easing were dashed.
"A 10 (basis point) cut in the deposit rate initially disappointed markets set up to expect fireworks from the ECB, which was quickly followed by another damp squib of a mere extension of the current ECB QE program," said Alastair George, Chief Strategist at Edison Investment Research.
"We are not sure why, having promised so recently to be focused on the external risks to the Eurozone economy the ECB was willing to disappoint the markets in this way."
The FTSEurofirst 300 fell 3.3 percent to 1,462.76 points, its biggest fall since August 24 and over 4 percent down from a three month high touched earlier in the session, shortly before the initial policy announcement.
Anticipation that ECB President Mario Draghi would ease monetary policy further had boosted European stocks in recent weeks, and the index remains up over 10 percent from September's low.
Although there remains the possibility of further stimulus in the future, strategists at UBS said that this was not their base case scenario.
"Mr Draghi reiterated that the QE programme continues to provide sufficient flexibility in terms of form, size and maturity - thus leaving the door open for more easing," strategists at UBS said in a note.
"(However), we think the implication of today's ECB communication is that further easing is unlikely unless the inflation and growth outlook suffers unexpected downside shocks."
The Euro STOXX 50 was down 3.6 percent, with every stock in negative territory.
Germany's DAX, which has many exporters, fell 3.6 percent, suffering from a rally in the euro. Sectors with lots of exposure to exports also fell, with the autos and parts sector also down 3.6 percent.
Non-euro zone indexes such as Britain's FTSE 100 and Switzerland's SMI outperformed, but were still down 2.3 percent and 1.8 percent respectively.
Among risers, Italian grid operators Snam and Terna rose 3.4 and 0.6 percent respectively after the Italian energy regulator set new criteria for investment returns.