UPDATE 2-German shares drag Europe lower as BASF profit warning bites

* BASF profit warning hits chemical, auto stocks

* Airlines stocks slip after France proposes eco-tax

* Danske Bank down on second profit warning

* Ocado gains after affirming forecast (Updates to close, adds quote)

By Agamoni Ghosh

July 9 (Reuters) - German shares drove Europe lower on Tuesday after a profit warning from chemicals giant BASF citing trade friction put chemical and auto makers on the back foot, while a slump in copper prices knocked mining stocks.

The pan-European STOXX 600 index closed 0.5% lower with most major indices in the red but Madrid's IBEX managed to outperform.

In the latest evidence of the U.S.-China trade war squeezing businesses, BASF warned that profit would fall below forecasts for the second quarter and the full year with the slowdown in global growth weighing on the agricultural as well as auto sectors.

The warning triggered several ratings downgrades from brokerages and knocked shares in peers such as Bayer, Covestro, Evonik and Wacker Chemie while pushing both Europe's chemicals and auto indexes over 1% lower.

"Not withstanding the softer macro, the magnitude of 2Q19 and FY19 profit warning within a span of three months shows that the BASF business model offers no obvious benefit from being almost everything to everybody in the sector," said JP Morgan analysts in a note.

The basic resources sub-sector shed over 2%, the most in the region with miners taking a hit as copper prices continued their recent slide on worries over waning demand from top consumer China.

Banks continued to suffer with Deutsche Bank extending its losses. It posted its worst day in five months in the prior session as investors questioned the bank's restructuring targets and its ability to make profits after it undertook a major overhaul.

Nordic lender Danske Bank which has been struggling to restore trust among investors after disclosing a major money laundering scandal also weighed on the sector after the banks cut its 2019 earnings forecast for the second time.

Airline stocks led by Ryan Air and Air France took a beating after the French government said it plans to introduce an eco-tax on airlines flying out of the country.

Among the bright spots, defensive sectors such as real estate moved higher, while Britain's Ocado rose over 5% to close at top of the STOXX 600 after the company said it was confident about its outlook despite a 46% fall in first-half core earnings.

After a sharp sell-off in May due to an escalation in U.S.-China trade tensions, European shares made a comeback on hopes that major central banks around the world would adopt a looser monetary policy.

Investors will now be watching out for Federal Reserve Chair Jerome Powell's comments from a two-day testimony before Congress starting Wednesday for clues about a rate cut.

(Reporting by Susan Mathew, Amy Caren Daniel and Agamoni Ghosh in Bengaluru; Editing by Arun Koyyur and Ed Osmond)