* STOXX 600 ends 0.7 percent lower
* Banks lead sectoral fallers
* Lundbeck slumps after study failure (ADVISORY- Follow European and UK stock markets in real time on the Reuters Live Markets blog on Eikon - see cpurl://apps.cp./cms/?pageId=livemarkets) Adds details, updates prices)
By Danilo Masoni and Atul Prakash
MILAN, Sept 23 (Reuters) - European shares ended weaker on Friday, pulling back from two-week highs in the previous session after the Federal Reserve signalled an increasingly cautious approach to future rate hikes, with banks leading sectoral fallers.
The pan-European STOXX 600 index ended 0.7 percent lower, retreating after closing at its highest level since Sept. 9 on Thursday. It rose 2.2 percent this week, the best performance in two months, but is still down more than 5 percent this year.
"The Fed-fuelled rally that catapulted shares out of the summer doldrums this week is showing some signs of fatigue," said Jasper Lawler, Market Analyst at CMC Markets.
"The focus would now begin to switch to upcoming economic data and whether that makes a rate hike in December more or less likely."
Futures are pricing the chance of a U.S. rate rise in December at 58.4 percent, according to CME's FedWatch tool.
Banks, which had rallied earlier this month on hopes that the Fed would increase rates this week, fell sharply.
The STOXX Europe 600 Banks index fell 1.5 percent, the top sector faller. It remains the weakest performer so far this year on concerns over falling profitability levels and capital shortfalls in a low-growth, low-rates environment.
Banco Santander, Bankia, Intesa Sanpaolo and Deutsche Bank fell 2 to 3 percent.
Among other sharp movers, Lundbeck slumped more than 15 percent, the biggest STOXX 600 faller, after the Danish drug maker's highly anticipated idalopirdine Alzheimer's drug failed in a late-stage study.
RWE fell 0.6 percent after Germany's second-biggest utility priced the initial public offering of its renewables, network and retail unit Innogy. The listing, Europe's biggest IPO since 2007, could fetch up to 5 billion euro and grab investors' interest.
"I will certainly look at Innogy," said Angelo Meda, head of equity and portfolio manager at Banor SIM in Milan.
"Any decision will be made once prices stabilise. In big spin-off deals like this, prices tend to be very volatile for a month or so as investors switch from one stock to the other."
On the positive side, Aryzta surged nearly 10 percent, the top gainer in the STOXX 600 index, after the Swiss bakery company said that Gary McGann will join its board as the chairman. (Additional reporting by Sudip Kar-Gupta and Hakan Ersen; Editing by Andrew Roche)