* FTSEurofirst falls back after Friday's rally
* Rebound in oil price fizzles out
* Greek shares outperform after S&P upgrade
* Spanish, Italian lenders weigh on banks (Adds closing prices.)
By Sudip Kar-Gupta and Danilo Masoni
LONDON/MILAN, Jan 25 (Reuters) - European shares fell on Monday as Spanish and Italian banks led a decline by banking shares and oil and gas companies lost ground when an oil price rally fizzled out.
The pan-European FTSEurofirst 300 index < .FTEU3>, which rose 3 percent on Friday to mark its first weekly gain for 2016, ended down 0.7 percent. The index is now down around 8 percent since the start of 2016.
The euro zone's blue-chip Euro STOXX 50 index < .STOXX50E> and Germany's DAX were down 0.7 and 0.3 percent respectively. The DAX is more than 20 percent below the record high it reached last April.
European bank shares declined the most, falling 3 percent. Italian banks were hit by continued uncertainty over how to deal with their bad loans. Spanish banks were under pressure as Spain struggled to form a new government after inconclusive elections last year.
Oil prices slid after rallying by 10 percent on Friday. That led to losses by companies such as BP, Total and Eni.
World stock markets have fallen since the start of 2016, partly due to signs of a slowdown in China, the world's second-biggest economy and a major consumer of oil and metals. That has pulled oil prices lower, along with concern about oversupply in the oil market.
Several investors and analysts said the situation remained volatile. JP Morgan's global equity strategist, Mislav Matejka, reiterated his recommendation to sell on any stock market rebound, such as the one on Friday.
"We reiterate our stance since November that the key strategy for the foreseeable future is to sell these rallies," he said.
Pierre de Saab, a fund manager at Dominice & Co, also warned that stock markets could fall further this year, given the signs of weakness in the global economy.
However, Greek shares managed to outperform. The benchmark ATG equity index, which fell around 30 percent in 2015 amid concern over Greece's debt problems, edged up 0.07 percent after Standard & Poor's upgraded its rating on Greece late on Friday.
Jyske Bank also rose 2.6 percent after the Danish bank forecast making an annual profit.
Today's European research round-up (Editing by Larry King)