European shares hit by drop in Italian banks, taking shine off rally

* FTSEurofirst 300 down 0.1 pct after Thursday's 3 pct rally

* Roche hit as two drugs fail tests

* Air France (Paris: FR0000031122 - news) tumbles after third profit warning

* Energy shares fall again with oil prices under pressure (Recasts, updates prices)

By Alistair Smout

LONDON, Dec 19 (Reuters) - European stocks edged lower on Friday, reversing an early rise, as Italian banks came under pressure from a downgrade by S&P and Swiss drugmaker Roche saw two major drugs fail tests.

The FTSEurofirst 300 index of top European shares was down 0.1 percent tot 1,355.47 points at 1113 GMT, retreating after a 3 percent advance on Thursday.

The index was still set for a 2.6 percent rise this week, its biggest weekly gain in a month, as the U.S. Federal Reserve's commitment to be "patient" about raising interest rates bolstered stocks.

"The Fed's statement earlier in the week helped to squeeze us higher. But the market doesn't have a high degree of conviction at the moment," Jeremy Batstone-Carr, market analyst at Charles Stanley (LSE: CAY.L - news) .

"The outlook remains one of sub-trend growth and low inflation. The downgrades in Italy illustrate that we're not out of the woods as far as growth is concerned."

Peripheral euro zone indexes were under pressure after the S&P cut Italian bank ratings, saying growth would be slower than expected. Italy's FTSE MIB was down 1.2 percent and Monte Paschi, Intesa Sanpaolo and UniCredit (Milan: UCG.MI - news) were down 2.5 to 4.7 percent.

Spain's IBEX also fell more than 1 percent.

Roche took the most points off the FTSEurofirst 300, falling 5.3 percent after tests of new Alzheimer's and breast cancer drugs both failed. Analysts said forecasts for 2015 would have to be revised downwards.

Air France-KLM (Other OTC: AFLYY - news) tumbled 8.3 percent after the airline issued its third profit warning in six months. It cut a 2014 earnings goal by 200 million euros as higher-than-expected costs from a recent pilot strike added to weaker unit revenues.

Oil and gas companies also lost ground again as oil prices dipped. Seadrill fell 9.6 percent and Technip 2.5 percent.

Cheaper oil has put the Russian economy under pressure, which has spread to European equity markets. Germany's BASF was down 2.4 percent, the biggest decline on the DAX, after it abandoned an asset swap with Russia's Gazprom.

"(The) earnings impact from termination of asset swap is likely to be mild, but investors may be disappointed that BASF retains a low-growth business it wanted to exit," Paul Walsh, analyst at Morgan Stanley (Xetra: 885836 - news) , said in a research note.

The DAX was down 0.1 percent.

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 Gareth Jones, Larry King)