Portuguese politics hits shares, leads Europe lower

* FTSEurofirst 300 down 0.3 pct, PSI (Taiwan OTC: 8028.TWO - news) 20 down 1.9 pct

* Portuguese banks fall as yields hit 4-mth high

* Continental (Swiss: CONT.SW - news) falls after missing earnings forecast

* Renault (Swiss: RNO.SW - news) under pressure as PM doesn't want Nissan deal

By Danilo Masoni and Alistair Smout

MILAN/LONDON, Nov 9 (Reuters) - European shares fell on Monday, led lower by a sharp drop in Portuguese shares, with investors unnerved by an agreement between leftist parties to work together to form a government.

Portugal's blue chip PSI 20 fell 1.9 percent, sharply underperforming a 0.3 percent dip for the FTSEurofirst 300.

Two small far left parties have concluded talks with the moderate Socialists to create an alternative government and oust the centre-right, whose prime minister acknowledged he could be forced into opposition.

More than 100 entrepreneurs have signed a manifesto arguing that uncertainty was compromising investment, balance sheets and jobs. The would-be partners also reject some reforms imposed to escape a debt crisis.

Portuguese sovereign bond yields hit a four-month high, with banks bearing the brunt of the stocks sell-off. Banif fell 7.1 percent, while Banco Comercial Portugues dropped 6.1 percent.

"Whiffs of crisis seem to be returning to Portugal... (There's) short-term volatility ahead, but we maintain a constructive outlook for the medium term," strategists at Credit Suisse said in a note.

"Any market volatility created by Portugal's political situation should be, however, contained, thanks to QE and to the presence of European monitoring. Moreover, Portugal is no longer in an extreme economic and financial situation."

Outside of Portugal, Continental was the top faller after missing earnings expectations, even as the auto parts maker lifted its full year outlook. Its shares traded down 5.4 percent.

The muted mood in autos spread to Renault, down 2.3 percent after French Prime Minister Manuel Valls said on Sunday the French government did not want a merger between the car maker and its Japanese partner Nissan..

Atlantia (Other OTC: ATASY - news) fell 3.4 percent after the Italian operator of highways and airports said it had broken off talks with international investors to sell a minority stake in its Rome airport unit.

German airline Lufthansa fell 2.4 after the company announced hundred of flight cancellations due to a strike action.

Energy stocks were the best performing sector with a gain of 1.5 percent, as oil futures rose towards $48 a barrel after OPEC said it expected global demand to remain strong next year.

Ericsson (Xetra: ERCA.DE - news) rose 2.2 percent after the telecoms equipment maker and networking group Cisco Systems (HKSE: 4333.HK - news) agreed a partnership expected to generate revenues of $1 billion for each company by 2018.

Europe bourses in 2015: http://link.reuters.com/pap87v

Asset performance in 2015: http://link.reuters.com/gap87v

Today's European research round-up (Editing by Jon Boyle)