Europe shares dip; banks see profit-taking after ECB tests

* FTSEurofirst 300 down 0.2 pct, trims last week's gains

* Investors book profits on banking shares after ECB tests

* Air France-KLM (Other OTC: AFLYY - news) drops; Morgan Stanley (Xetra: 885836 - news) trims profit forecast

By Blaise Robinson and Sudip Kar-Gupta

PARIS/LONDON, Oct 27 (Reuters) - European stocks dipped on Monday as investors seeing a key index of German business sentiment hit its lowest level in almost two years decided to book some of last week's sharp gains.

Following an early rally, most euro zone banking stocks turned negative in late morning as traders took profits off the table after the sector's 14 percent surge since mid-October in the run-up to the results of the European Central Bank sector review.

"I think it's a case of 'buy the rumour and sell the fact'," said Terry Torrison, managing director at Monaco-based McLaren Securities.

"We had a decent run-up ahead of the stress test results, but everyone was jumping on the bandwagon and ramping things up this morning without any clear reason, given that the results of the stress test were in line with market expectations."

Among the top gainers, shares in Germany's Commerzbank gained 1.3 percent while Austria's Erste Group Bank added 4.9 percent. Both lenders passed the tests.

Overall, the STOXX euro zone bank index was down 1.6 percent around midday on Monday, trimming sharp gains made in the past 10 days. Spain's BBVA, France's Societe Generale and Germany's Deutsche Bank (Xetra: 514000 - news) - which all passed the tests - were down 0.6-2.1 percent.

Shares (Berlin: DI6.BE - news) in Italy's Monte dei Paschi (Milan: BMPS.MI - news) slumped 20 percent after the ECB review found it had the biggest capital hole to fill among European banks.

Overall, the results of the tests were seen as positive by traders and fund managers.

"One good sign was that a big part of the required capital was already raised," said Francois Savary, chief investment officer at Swiss bank Reyl.

"Another potential surprise was that no major Spanish bank failed, which is further proof that Spain is on the right path. All in all, a positive development."

At 1128 GMT, the FTSEurofirst 300 index of top European shares was down 0.2 percent at 1,309.87 points. The index chalked up gains of 2.5 percent last week, recording its best weekly gain since December 2013.

Hurting sentiment on Monday, the Munich-based Ifo think-tank's business climate index, based on a monthly survey of some 7,000 firms, fell to 103.2 from 104.7 the previous month, suggesting Europe's largest economy could be in for a bumpy ride in the fourth quarter.

Around Europe, UK's FTSE 100 index was down 0.2 percent, Germany's DAX index down 0.4 percent and France's CAC 40 down 0.3 percent.

Shares in TNT Express sank 7 percent after the Dutch logistics company issued a fresh alert over the impact of fierce competition and weak growth in its core markets.

Air France-KLM fell 4.2 percent, hurt by a downbeat note from Morgan Stanley which trims its earnings forecast and share price target for the airline. Also adding to pressure on the stock, Dutch newspaper De Telegraaf said deep cost cuts at Air France-KLM were needed.

Europe bourses in 2014: http://link.reuters.com/pap87v

Asset performance in 2014: http://link.reuters.com/gap87v

Today's European research round-up

(Editing by Tom Heneghan)