Plunge in Erste Bank halts European stocks rally

* Vienna stock market down 3.2 pct as Erste slumps

* Erste drags down other rival banks

* Broader European markets remain near multi-year highs

* FTSEurofirst 300 down 0.1 pct but near 6-1/2 year high

* U.S. market closed for public holiday

By Sudip Kar-Gupta

LONDON, July 4 (Reuters) - A slump in the shares of Austrian bank Erste hit the Vienna stock market on Friday and halted a rally on the broader European equity market which had hit multi-year highs this week.

Erste dropped by 14 percent after the bank, which is the third-biggest lender in emerging Europe, warned that fresh hits from Romania and Hungary would drive it to a record 2014 loss.

Erste also dragged down the shares of rival Austrian bank Raiffeisen and weighed on Vienna's benchmark ATX index, which fell by 3.2 percent and underperformed other major European stock markets.

The STOXX Europe 600 Banking Index declined 0.6 percent, with other banks with links to eastern Europe also falling, such as Intesa which weakened by 1.7 percent and UniCredit (Milan: UCG.MI - news) which fell 1.6 percent.

"Austria's banking system is particularly vulnerable due to its historic ties to eastern Europe," said HED Capital head Richard Edwards.

VIENNA UNDERPERFORMING

Edwards backed going "short" to bet on more losses for the Vienna's ATX index, which is one of western Europe's smaller stock markets.

The ATX is down by around 3.5 percent since the start of 2014, underperforming a 5 percent rise on Germany's DAX - which has hit record highs - and a 6 percent advance on the pan-European FTSEurofirst 300 index.

The broader FTSEurofirst 300 index, which had risen for the last three days in a row to hover near 6-1/2 year highs, slipped by 0.1 percent to 1,396.80 points.

The euro zone's blue-chip Euro STOXX 50 index also retreated 0.3 percent to 3,281.20 points.

Trading activity was thin on Friday, with the U.S. stock market shut for a national holiday.

In spite of Erste's problems, many traders remained optimistic that European equities would rally towards the end of 2014, helped by a backdrop of strong U.S. jobs growth and economic stimulus measures from the European Central Bank (ECB).

They said that, for now, the falls at Erste and the Vienna market were not big enough to hit bigger banks and bigger European equity indexes.

"You can't fight the tape, it's as simple as that," said Justin Haque, a broker at Hobart Capital Markets, referring to the power of a market trend.

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

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

Today's European research round-up (Additional reporting by Francesco Canepa; Editing by Ruth Pitchford)