European shares end week with a gain; banks volatile on rate talk

* STOXX up 0.2 pct, posts weekly gain

* Euro zone bank index hits 15-month high, then eases

* Tullow Oil (LSE: TLW.L - news) plunges on rights issue news (Recasts, adds detail and updates prices at close)

By Danilo Masoni and Kit Rees

LONDON, March 17 (Reuters) - European shares edged higher on Friday, though weaker auto stocks euro zone banks weighed.

The latter had hit a fresh 15-month high but fell back after a European Central Bank policymaker rekindled talk of a possible rate hike.

Ewald Nowotny said the ECB would decide at a later date whether to raise interest rates before or after ending its bond purchasing programme, pushing euro zone government bond yields higher.

He said the ECB could hike its below-zero remuneration of bank deposits before the main rates at which it lends to banks.

Traders said his comments sparked an early rally in bank stocks but the sector turned lower later. The STOXX 600 nevertheless ended up 0.2 percent with a 1.4 percent gain for the week.

Money markets showed at one point an 80 percent chance the ECB would lift its deposit rate in December, up from 60 percent a week ago.

Rabobank analysts said Nowotny's comments had been over-interpreted, even though they could not rule out the possibility of the ECB tightening policy before ending its asset-buying.

The euro zone bank index rose as much as 1.4 percent before paring gains and ended the session down 0.1 percent, weighed by losses in Erste Group Bank (EUREX: EBO.EX - news) , ABN AMRO Group (Amsterdam: ABN.AS - news) and Deutsche Bank (IOB: 0H7D.IL - news) , which all fell between 1.5 percent to 1.9 percent.

Europe's broader bank index reversed course to fall 0.6 percent, weighed down by Nordea Bank (LSE: 0JNL.L - news) going ex dividend and trading 6.3 percent lower. In spite of the volatility, some investors were upbeat about prospects for the sector, whose margins have been squeezed by ultra-easy central bank policy.

"I think Nowotny and a lot of the regulators and central bankers realise that negative interest rates have been a disaster for the economy and they're going to get more positive," said David Hussey, head of European equities at Manulife Asset Management in London.

"There is a good short-term trade in banks and there is a medium- to long-term buy case for European financials generally as regulation and the economy improves," he added.

Autos also fell, dropping 0.5 percent.

Top fallers in the auto sector included German carmakers Porsche, Volkswagen (IOB: 0P6N.IL - news) and BMW (EUREX: BMWE.EX - news) , down between 0.9 percent and 1.9 percent.

Elsewhere, Tullow Oil plunged 14.7 percent, the biggest faller on the STOXX 600 index, after the British oil services company announced a 607 million pound share sale to reduce its debt.

But London-focused housebuilder Berkeley Group rose 6.1 percent to its highest level since Britain voted to leave the European Union, as investors cheered full-year forecasts at the top end of market estimates.

German airport operator Fraport (IOB: 0O1R.IL - news) rose 4.8 percent, also boosted by well-received 2017 guidance. (Reporting by Danilo Masoni and Kit Rees)