European shares retreat from highs, dragged lower by automakers

* FTSEurofirst 300 down 0.9 pct, below 7-1/2 year high

* Peugeot (Other OTC: PUOGF - news) falls as car sales growth lower than sector

* DAX underperform as ZEW survey lower than expected

By Atul Prakash

LONDON, March 17 (Reuters) - European shares retreated from a 7-1/2-year high on Tuesday, with PSA Peugeot Citroen leading automakers lower after the release of car sales data and a German economic sentiment survey coming in below expectations.

Germany's DAX, down 1.6 percent, underperformed the broader market after hitting a new record high in the previous session. The pan-European FTSEurofirst 300 index index was down 0.9 percent at 1,580.58 points at 1129 GMT after hitting a 7-1/2-year high of 1,598.03 earlier in the session.

The STOXX Europe Automobiles and Parts index fell 2.7 percent, the top sectoral decliner, dragged down by a 7.8 percent fall in Peugeot after the automaker's vehicle sales rose less than the sector in February.

"The new car sales from Peugeot are disappointing. Peugeot (Hanover: PEU.HA - news) underperformed the European auto market in February with an increase limited at 1.1 percent," a Paris-based trader said.

Data from the Association of European Carmakers (ACEA) showed new car registrations in Europe rose 7 percent in the month of February, fuelled by double-digit sales growth in Italy and Spain.

The European stock market saw further selling pressure after the Mannheim-based think tank ZEW said its monthly survey of economic sentiment increased to 54.8 in March from 53.0 in February. This was below a Reuters consensus forecast of 58.2. ZEW warned a lack of progress in the Greek and Ukraine crises was dampening sentiment.

However, analysts stayed positive on the market's longer-term outlook. The FTSEurofirst 300 index has risen more than 15 percent so far this year as bond purchases from the European Central Banks drove yields on government debt to record lows, leading investors to seek higher returns in equities.

"European assets are in a powerful catch-up rally, which is not over," said Pascal Blanque, chief investment officer at Amundi, which has 850 billion euros ($902 billion) in assets under management.

"With the euro falling, the QE (quantitative easing) starting, the recent improvement in macro indicators, European assets are in a sweet spot. It could last for a while, as long as global growth remains above 3 percent."

Greek banks rose 3.8 percent, helped by a 6.9 percent gain in Bank of Piraeus and a 4.6 percent stronger Alpha Bank (Other OTC: ALBWF - news) on expectations that the Greek debt crisis will eventually get resolved.

A Greek government official said on Tuesday that Prime Minister Alexis Tsipras has asked for a meeting with top European policymakers including German Chancellor Angela Merkel and European Central Bank chief Mario Draghi on the sidelines of an EU summit this week. (Additional reporting by Alexandre Boksenbaum-Granier and Blaise Robinson in Paris and Francesco Canepa in London; Editing by Raissa Kasolowsky)