Wires

European shares hit by weak earnings outlook

* FTSEurofirst 300 falls 0.5 pct, Euro STOXX 50 down 0.6 pct

* Subdued start to U.S. earnings season dents sentiment

* EADS rises 5.3 pct as BAE merger talks collapse

By Francesco Canepa

LONDON, Oct 10 (Reuters) - European shares fell for a thirdstraight session on Wednesday, dragged lower by expectations ofweak corporate earnings in the region after a subdued start tothe U.S. reporting season.

Merger and acquisition news provided one of the main driversof the day when EADS

and BAE Systems

called offthe world's largest defence and aviation merger, sending EADSshares up and BAE down.

Shares in Bang & Olufsen

fell 3.8 percent in volumenearly four times their daily average as the Danish stereo andtelevision maker recorded a much wider than expected quarterlyloss due to weakening demand for luxury goods.

It added to investor concerns after U.S. bellwetheraluminium maker Alcoa

cut its demand forecasts and oilmajor Chevron Corpissued a profit warning.The STOXX 600 indexof Europe's 600 largestcompanies fell 0.6 percent.

"I think the earnings season is going to be verydisappointing," said Robert Quinn, chief European strategist atStandard & Poor's Capital IQ.

"There may even be the case for a reversal (of the recentequity rally), with the macro side still negative while theimpulse from policy won't be contributing very much."

He expected the STOXX 600 to end this quarter flat to lowerafter gaining nearly 7 percent in the previous three months,boosted by the European Central Bank's pledges to save the euroand support the region's struggling economies.

The index has retreated 2.8 percent from a 14-month high hitin mid-September as Spain has hesitated to apply for a bailoutthat would pave the way for ECB intervention to begin, whileinvestors have turned their focus to the bleak outlook for theEuropean economy and corporate profits.

STOXX 600 companies are expected to miss earnings estimatesby an average 1.1 percent in the third-quarter reporting season,due to start later this month, according to Starmine data.

"The main risk is a raft of downgrades on the earningsseason in the cyclical sectors, especially in technology andindustrials," said Claudia Panseri, global equity strategist atSociete Generale.

Panseri advised her clients to steer clear of industrial andtech stocks, where she saw the greatest downside risk toearnings. She recommended positioning in sectors where room fromdownside surprises is limited such as utilities in peripheraleuro zone countries and banks in the United States and Europe.

She added utilities had started to cut capex and were poisedto report an increase in earnings while ebullient financialmarkets in the third quarter were likely to result in healthytrading profits for banks.

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EADS, BAE

Traders said many investors were reluctant to make big betsbefore corporate earnings are released, resulting in lighttrading volume on the STOXX 600 of less than 80 percent of its90-day average.

That made M&A news a key focus when EADS and BAE Systemscalled off their merger plans and pinned the blame on Germanyfor wrecking the $45 billion deal.

Shares in EADS rose 5.3 percent in volume more than eighttimes their 90-day trading average as they decoupled from theproposed 60-40 swap ratio with BAE's shares, which fell 1.4percent in twice their average volume.

"Now that the deal has failed, that alignment has no reasonto exist," a Paris-based analyst said.

The end of the talks proved profitable news for the hedgefunds and arbitrage traders using a so-called 'Chinese spread',which involves buying shares in the potential buyer, EADS inthis case, and selling stock in the target, BAE.

With EADS stock up around 8.5 percent since mid-Septemberand BAE down 10 percent, however, such merger arbitrage tradesset up within days of news of the talks were ahead by a hefty18.5 percent on Wednesday.

EADS was the top gainer on the FTSEurofirst 300

index on Wednesday, with the pan-European index down 0.5 percentat 1,090.03 points by the close.

The euro zone Euro STOXX 50

index fell 0.6percent to 2,456.54, testing support in the 2,450 area,corresponding to early September lows.

(Additional reporting by Blaise Robinson in Paris and SudipKar-Gupta; Editing by Hugh Lawson)

((francesco.canepa@thomsonreuters.com)(0044)(0)(2075423871)(Reu

ers Messaging: francesco.canepa.thomsonreuters.com@reuters.net))

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