European shares sag as Eutelsat and Drax drop

* Eutelsat (Paris: FR0010221234 - news) and Drax slump after broker downgrades

* But cost cutting plans lift Telecom Italia (Other OTC: TIAJF - news) shares

* Morgan Stanley (Xetra: 885836 - news) raises "defensive" stocks to overweight (ADVISORY- Reuters plans to replace intra-day European and UK stock market reports with a Live Markets blog on Eikon (see cpurl://apps.cp./cms/?pageId=livemarkets for site in development). Adds details, updates prices)

By Danilo Masoni

MILAN, May 16 (Reuters) - European shares fell on Monday with satellite operator Eutelsat and power station company Drax slumping after broker downgrades.

Leading investment bank Morgan Stanley also advised investors to stick with "defensive" stocks, namely those with solid dividends and cashflow, given signs that the market environment would remain difficult for this year.

The pan-European FTSEurofirst 300 index was down 0.4 percent. Volumes were thin with the German and Swiss markets closed for a public holiday.

Eutelsat, which plunged 27.6 percent on May 13 after the company cut its outlook, dropped a further 7 percent on Monday after Morgan Stanley cut its rating on the stock to "underweight" from "equal weight".

Drax also fell sharply after Bernstein issued a similar downgrade on the stock.

The FTSEurofirst is down by around 9 percent so far in 2016, with global stock markets affected by concerns about weakness in China, the world's second-biggest economy.

Doubts about whether China's economy is stabilising resurfaced over the weekend when data showed investment, factory output and retail sales in the country all grew more slowly than expected in April.

Morgan Stanley said in a note that the uncertain outlook meant it was a good time to favour defensive stocks.

"Although we have been cautious on European equities for the last six months, we have not been positive on 'Defensives' as we found them both overbought and expensive," said Morgan Stanley's strategists.

"Although the latter issue has not improved materially, the group's underperformance creates a more attractive entry point, we believe, in the face of a tricky market environment this year," they added.

JCI Capital portfolio manager Alessandro Balsotti also said the renewed concerns over China could affect markets this week.

In spite of the weaker market backdrop, Telecom Italia rose 3.5 percent, as investors welcomed a move by Italy's biggest telecoms group to more than double the cost cutting target in its new business plan.

"The positive surprise on cost savings would justify a double-digit share price performance," said Banca Akros analyst Andrea De Vita.

Today's European research round-up

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Mike Dolan, Markets Editor EMEA. (Additional reporting by Sudip Kar-Gupta; Editing by Toby Chopra)