* Portuguese index up 0.6 pct; weekly loss worst since 2010
* FTSEurofirst 300 up 0.2 pct, worst weekly drop since April
* BES down 5.5 pct after update but others seen unaffected
LONDON, July 11 (Reuters) - European markets steadied and shares in Lisbon staged a small bounce on Friday as concerns eased about the health of Portugal's largest bank and its impact on the euro zone financial system.
Banco Espirito Santo said late on Thursday that losses associated with the founding family and its holding company would not affect the bank. That calmed investor worries about a chain reaction hitting other banks, especially in the euro zone's periphery.
Lisbon's PSI 20 index rose 0.6 percent on Friday but was still down 10 percent on the week, its biggest drop since 2010, when the country's sovereign debt crisis started.
The pan-European FTSEurofirst 300 index edged up 0.2 percent to 1,352.11 points but closed the week 3.5 percent lower, its steepest loss since April.
Doubts about the financial health of the family that controls BES had pulled the PSI 20 to a nine-month low on Thursday and rocked bourses across Europe.
"While the bank has some exposure to the holding company, over a billion euros, it's very clear that they have enough excess capital, over 2 billion euros," said Veronika Pechlaner, who helps manage $13 billion of assets at Ashburton Investments.
"So the systemic risk to the Portuguese banking system is limited, and that's what the market is telling you."
Shares in BES opened for trading late on Friday morning and closed a volatile session 5.5 percent lower, as investors factored in the bank's newly released estimates about its exposure to its holding company.
Analysts at Portugal's BPI wrote in a note that the announcement was negative, as the overall direct and indirect exposure, including guarantees, was around 850 million euros higher than previously mentioned.
"Still, we welcome the additional visibility provided with yesterday's release on the group's exposures which should help, though there was no clarification on whether there are provisions made on these exposures," they said.
An initial bounce in equity indexes across Europe fizzled out in the afternoon as weak industrial output data earlier this week, and the lingering uncertainty regarding Portugal, made investors reluctant to dip back into the market.
"After what we've seen this week, with the Espirito Santo situation and the industrial production data, we're taking a cautious approach here," Mike Harris, a partner at TJM Partners, said. "The question here is whether we're shifting from a buy-dips mentality to sell the rally."
Trading volume on the FTSEurofirst 300 was almost 20 percent lower than its full-day average for the past three months.
Europe bourses in 2014: http://link.reuters.com/pap87v
Asset performance in 2014: http://link.reuters.com/gap87v
Today's European research round-up
(Additional Reporting by Andrew Winterbottom and Lionel Laurent; Editing by Mark Trevelyan)