European shares recover as bond selloff eases, euro falls

* FTSEurofirst 300 index falls 0.2 percent

* Bonds erase losses, euro turns lower

* Metro (Other OTC: MTRAF - news) , Morrisons slip; Beiersdorf (Other OTC: BDRFF - news) gains

By Atul Prakash and Francesco Canepa

LONDON, May 7 (Reuters) - European shares recouped most of their daily losses to trade modestly lower on Thursday, as a selloff in government bonds eased and the euro gave up its gains against the dollar, partly helped by some estimate-beating U.S. data.

Germany's DAX index, which is heavily export-oriented and benefits from a weak euro, led the recovery, trading 0.2 percent higher.

The euro, which had earlier hit a 10-week peak against the dollar, weakened after the U.S. reported fewer initial jobless claims than expected and German government bond yields fell .

This week, a rebound in oil prices suggested any threat of deflation is receding. That in turn suggested the U.S. Federal Reserve will raise interest rates sooner than expected, despite mixed economic data, which triggered sell-offs in bonds and shares.

The sell-offs were exacerbated by the unwinding of positions in euro zone equities and bets against the euro built up since the European Central Bank began its quantitative easing programme in March.

"Is the unwind done? If so, then equities can rally further," the head of a London trading desk said.

The broader pan-European FTSEurofirst 300 index was down 0.2 percent at 1,543.45 points after falling to its lowest since late February in morning trading.

Britain's FTSE 100 index fell 0.9 percent on the day of an election that could yield a weak government, propel it towards a vote on EU membership and foster Scottish secession.

The euro's recent gains against the dollar hurt expectations for export-oriented European companies, such auto makers and industrial companies.

"The (weaker) dollar ... is definitely a burdening factor for European equities as the correlation between the U.S. currency and European equities is extremely high," UniCredit (Milan: UCG.MI - news) strategist Christian Stocker said.

"From a sectoral point of view, this is important and definitely negative for cyclical sectors such as automobiles and industrials."

Among individual sharp movers, building material company HeidelbergCement (Other OTC: HDELY - news) rose 3.3 percent after posting estimate beating results.

Germany's Beiersdorf rose 3.4 percent to be the top DAX performer. The company reported first-quarter core profit rose more than expected, helped by demand for its products in Eastern Europe.

Morrisons slipped 6.6 percent to record the biggest decline in the FTSE 100. Britain's No. 4 grocer reported a further deterioration in underlying sales.

Swiss staffing firm Adecco (VTX: ADEN.VX - news) fell 6 percent, the worst performance in the FTSEurofirst 300 index, after both its chief executive and chief financial officer quit.

(Editing by Larry King)