* FTSEurofirst 300 up flat, halting last week’s 3 pct drop
* Portuguese stocks bounce back, but still in bear market
* Shares in Banco Espirito Santo still suspended
By Blaise Robinson
PARIS, Aug 4 (Reuters) - European stocks were steady in early trade on Monday, halting last week’s sharp sell-off, as a rescue deal for troubled Banco Espirito Santo helped ease fears over the fate of Portugal’s biggest lender.
Following a frenzied weekend of discussions between Portuguese and European Union officials, Portugal agreed to spend 4.9 billion euros ($6.58 billion) to rescue Banco Espirito Santo, or BES, its largest listed bank. The deal comes just months after the country exited an international bailout.
While BES shares - which plunged 73 percent last week - were still suspended, shares in Portugal’s second-largest listed bank Millennium bcp rose 6.1 percent and Portugal Telecom added 3.8 percent.
Portugal’s PSI 20 benchmark was up 1 percent, bouncing back following recent sharp losses. The index last week slipped into bear market territory, down about 25 percent since early April.
Portuguese 10-year yields dipped 1.4 basis points to 3.71 percent with the problems around BES seen contained for now.
“The market’s initial reaction is that it’s pretty reassuring to see Portugal moving quickly to rescue BES. We don’t have all the details, but overall it eases systemic fears that had resurfaced last week,” Saxo Bank sales trader Andrea Tueni said.
“But it’s not enough to spark a real rebound in the overall market. This is mostly a technical bounce from last week’s slide and the trend remains negative for now. We’re at key support levels, and it might just be a pause.”
At 0811 GMT, the FTSEurofirst 300 index of top European shares was up 0.03 percent at 1,333.08 points, staging a technical bounce after dropping nearly 3 percent last week.
The trouble at BES had dragged the euro zone banking sector index down 3.4 percent last week, reviving concerns about lenders, particularly in southern Europe, hit hard by the prolonged sovereign debt crisis.
But the sector inched higher on Monday, up 0.7 percent, while shares in Credit Agricole - which has a significant stake in BES - were up 0.7 percent.
“The issues at BES could cost Credit Agricole 1 billion euros, about 500 million euros coming from the write-off of the stake and another 500 million coming from BES’s loss for the second quarter,” a Paris-based trader said.
“The impact for Credit Agricole represents about 4 percent of its market capitation, and it’s mostly priced in already.”
Shares in Credit Agricole, which is set to report results on Tuesday, are down 16 percent since mid-June.
Shares in Banco Espirito Santo had been targeted by hedge fund short sellers, betting on the stock to drop.
According to data from Markit, about 6 percent of the group’s shares were out on loan last week. The paper gain for hedge funds during the week on BES’s stock meltdown represented roughly 110 million euros ($147 million), according to Reuters calculations.
Short selling - a trading strategy popular with hedge funds - involves borrowing a security and selling it, betting that the price will fall. Short sellers then buy it back at a lower price and return it to the lender, pocketing the difference.
Europe bourses in 2014: link.reuters.com/pap87v
Asset performance in 2014: link.reuters.com/gap87v
Today’s European research round-up
Editing by Catherine Evans