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European shares drop for third day but sell-off loses strength

(ADVISORY- Follow European and UK stock markets in real time on the Reuters Live Markets blog on Eikon - see cpurl://apps.cp./cms/?pageId=livemarkets)

* STOXX Europe 600 falls 0.9 percent, off earlier lows

* U.S (Other OTC: UBGXF - news) . rate hike in September seen possible

* Volatility touches after quiet summer

* E.ON drops after Uniper spin-off

By Danilo Masoni and Alistair Smout

MILAN/LONDON, Sept 12 (Reuters) - European shares ended at their lowest point in two weeks on Monday, adding to losses seen last week as investors fretted over a possible near-term rate hike in the United States.

The third day of losses came after bonds had sold off on the back of expectations the Fed could lift rates already next week and the European Central Bank may slow down stimulus measures.

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Europe's STOXX 600 ended down 0.95 percent with growth-sensitive sectoral indexes like basic resources and banks leading the fallers.

The pan-European index, however, came off lows after touching earlier in the session a one-month low, as some investors said the sell-off could be short lived.

"Buying the lows in a rangebound market is usually a great strategy, until the final dip which turns into a sell-off," Chris Beauchamp, market analyst at IG (LSE: IGG.L - news) in London said. "This dip could continue for a few more days, but as volume returns and bargains emerge, I would not be surprised to see a fresh rally."

Earlier this month the STOXX 600 hit its highest level since January, driven by a rally of more than 10 percent from lows hit after Britain voted to leave the European Union.

Others including Stephane Ekolo, Chief European Strategist at Market Securities, remained bearish on the market's prospects.

"Any Fed rate hike should be detrimental for the equity market. I see more probable a more severe correction than what we are currently facing," Ekolo said, mentioning a mix of no earnings growth, bad economic data and global political risks.

Volatility, an indicator of investor nervousness, touched its highest level since early August, having been low for much of the summer. It later reduced its gains to end at a three week high.

The rise of quantitative and algorithmic trading, aided by persistently low volatility, has made market pullbacks swifter than they used to be, said JCI portfolio manager Alessandro Balsotti.

"The problem is always forecasting the right timing and this, instead, has become harder in the current financial universe, more and more driven by the search of a yield that is disconnected from fundamentals," he said.

German-listed E.ON was the top faller, down 14.8 percent after it spun off its Uniper division, while Linde (Amsterdam: LE6.AS - news) dropped 7 percent after its Praxair (NYSE: PX - news) merger fell apart.

Associated British Food fell 10.8 percent after its results, with traders citing weak trading for its flagship Primark business, despite the company lifting its outlook for the second time in two months.

Among the few gainers, German lighting group Osram surged 10.1 percent following a report that Siemens (Berlin: 29783751.BE - news) was weighing selling its 17 percent stake in its former unit. (Reporting by Danilo Masoni; Editing by Toby Chopra)