European shares fall as banks hit by fresh euro zone turmoil
* FTSEurofirst 300 drops 0.7 percent
* Euro zone banks suffer as Portuguese government teeters
* PSI 20 sees biggest drop since 2010
* Egypt crisis and China growth concerns hit riskier stocks
LONDON, July 3 (Reuters) - Banking stocks dragged European shares lower on Wednesday, as political turmoil in Portugal drove Lisbon's bourse to its worst day in three years and threatened to reignite the euro zone crisis.
Euro zone banks fell 1.8 percent after the Portuguese government called emergency talks on its future. That pushed the country's bond yields over 8 percent and sent the blue-chip PSI 20 down 5.3 percent.
Doubts over Greece's ability to fulfil the conditions of its bailout added to fears about a new flare-up in the debt crisis.
The pan-European FTSEurofirst 300 closed 0.7 percent lower, down 7.87 points, at 1,150.90, with banks knocking 2.9 points off the index.
Emerging markets worries also resurfaced.
Egypt's President looked set for a showdown with the army, while data from China revealed further signs that the world's second-largest economy is losing momentum. Basic resources stocks closed 1.3 percent lower.
"Banks are down because of their exposure to the bond markets, and cyclicals are suffering too. What with everything that's going on in Egypt, and China overnight ... it's a case of emerging markets weakening." said Nick Xanders, heads of European equity strategy at BTIG.
"Anything you've got that has emerging market exposure should be jettisoned. People keep trying to bottom-fish the miners, but that needs China to rebound dramatically, which I doubt they will."
The FTSEurofirst 300's top faller was Portuguese utility EDP , down 6.4 percent, while Banco Espirito Santo and Banco Comercial Portugues fell 11 percent and 12.9 percent respectively.
The PSI 20 index has lost nearly 20 percent since early May, and is down 7.4 percent year-to-date, Europe's second worst performer after Athens' ATG, which is down 9.8 percent.
"The notions of 'country risk' and 'systemic risk' are back," said David Thebault, head of quantitative sales trading at Global Equities. "With that hitting the fan now, you can't stay 'long' equities."
Credit rating cuts also hit banks. Standard & Poor's downgraded Barclays, Credit Suisse and Deutsche Bank on concerns tougher regulation and uncertain market conditions would crimp revenues.
Moody's downgraded bailed-out Spanish banks Bankia , Catalunya Banc and NCG Banco, complicating Madrid's efforts to sell them. It said their credit profiles remained very vulnerable, despite state support.