Banks halt European share rally on Italian debt scare

LONDON, March 11 (Reuters) - Banking stocks held European shares below 4-1/2 years highs on Monday, depressed by a worsening outlook for Italy's public finances.

The STOXX euro zone banking index shed 0.8 percent, as a downgrade of Italy's sovereign debt rating late on Friday triggered a selloff in the country's banks, which own much of Rome's public debt.

Milan-listed Mediobanca, BP Emilia and Banco Popolare led sector fallers, shedding between 3 percent and 5 percent, after Fitch warned that inconclusive elections last month threatened to delay much-needed economic reforms.

"Everyone I talk to wants to steer clear of Italy until there is clarity on the political situation," one senior pan-European trader in Milan said.

"Banks are hit first but I think that, slowly but surely, everything will come off."

The banks capped gains on the pan-European FTSEurofirst 300 index, which provisionally closed flat at 1,194.83 points, keeping below a high of 1,197.73 hit on Friday and previously not seen since 2008.