European shares pull back after Fed-inspired rally; RWE falls

* STOXX 600 down 0.7 percent

* Banks lead sectoral fallers

* RWE (LSE: 0FUZ.L - news) down after green unit IPO pricing

* Lundbeck slumped after study failure (ADVISORY- Follow European and UK stock markets in real time on the Reuters Live Markets blog on Eikon - see cpurl://apps.cp./cms/?pageId=livemarkets) Adds details, updates prices)

By Danilo Masoni

MILAN, Sept 23 (Reuters) - European shares fell on Friday, pulling back from two-week highs hit the previous session after the Federal Reserve signalled an increasingly cautious approach to future rate hikes, with banks leading sectoral fallers.

The pan-European STOXX 600 index was 0.7 percent lower, retreating a touch after having closed at its highest level since Sept. 9 on Thursday.

The index is down over 5 percent so far this year but was on course to end the week with a gain of more than 2 percent.

"The Fed-fuelled rally that catapulted shares out of the summer doldrums this week is showing some signs of fatigue," said Jasper Lawler, Market Analyst at CMC Markets (LSE: CMCX.L - news) .

"The focus would now begin to switch to upcoming economic data and whether that makes a rate hike in December more or less likely," he added.

Futures are pricing the chance of a U.S. rate rise in December at 58.4 percent, according to CME's FedWatch tool.

Banks, which had rallied earlier this month on hopes that the Fed could increase interest rates already this week, fell sharply, weighed down by losses of 1.6 to 2.9 percent for Banco Santander, HSBC and Intesa Sanpaolo (Amsterdam: IO6.AS - news) .

Europe's STOXX Bank index fell 1.3 percent. The index remains the weakest performer so far this year on concerns over falling profitability levels and capital shortfalls in a low growth, low rates environment.

RWE fell 1.6 percent after Germany's second-biggest utility priced the initial public offering of its renewables, network and retail unit Innogy. The listing, Europe's biggest IPO since 2007, could fetch up to 5 billion euro and likely grab investors' interest.

"I will certainly look at Innogy," Angelo Meda, head of equity and portfolio manager at Banor SIM in Milan.

"Any decision will be made once prices stabilise. In big spin-off deals like this, prices tend to be very volatile for a month or so as investors switch from one stock to the other. It's unlikely though that they will keep positions in both," Meda (Frankfurt: 935166 - news) added.

Lundbeck slumped 14.4 percent, the biggest STOXX 600 faller, after the Danish drug maker's highly anticipated idalopirdine Alzheimer's drug failed in a late-stage study.

Miners were also under pressure on Friday with the STOXX Basic Resources (Frankfurt: W8Z.F - news) down 1 percent after touching in the previous session its highest level since August 2015. (Additional reporting by Sudip Kar-Gupta and Hakan Ersen; Editing by Hugh Lawson)