European shares sag on bond market and foreign exchange jitters

* FTSEurofirst 300 down 0.4 pct, DAX slips 0.2 pct

* Public holiday in much of Europe but markets open

* Rise in yields and euro currency weigh on equities

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

By Sudip Kar-Gupta

LONDON, May 14 (Reuters) - European shares extended a losing streak on Thursday as bond market jitters and a rebound in the euro currency, whose weakness has benefited many European exporters, weighed on stocks.

Record (LSE: REC.L - news) low interest rates and government bond purchases by the European Central Bank (ECB) have kept a lid on the euro and buoyed European stocks, but signs of a rebound in the currency and on bond yields have caused volatile market movements.

The pan-European FTSEurofirst 300 index was down by 0.4 percent at 1,563.16 points in early session trading. The FTSEurofirst lost ground in the previous two sessions, although it remains up by around 14 percent since the start of 2015.

Germany's DAX, which hit a record high last month, also fell 0.2 percent while France's CAC declined by 0.5 percent. Trading volumes were expected to be subdued due to a public holiday across much of Europe.

Italian shoe maker Tod's fell 2.2 percent after it posted a larger-than-expected drop in first-quarter core earnings, although insurer Generali rose after posting higher profits.

A pick-up this week in benchmark German and U.S. bond yields has made equities look more expensive in comparison to debt, and caused some investors to trim back equity positions to cash in on the stock market rally so far this year.

"The bond market moves are making investors quite anxious. I think everyone expected yields to rise once we started to see a bounce in oil prices as, naturally, this would change people's inflation outlook," said Oanda senior market analyst Craig Erlam.

"The pace at which they've risen has been quite surprising, which is probably a consequence of a lack of liquidity in the market at the moment. A small change in attitude can have a much greater impact," he added.

Stocks were also pegged back after the dollar weakened broadly in Europe on signs that a slowdown in the U.S. economy at the start of the year was stretching into the second quarter.

The dollar's decline pushed up the value of the euro against the dollar on currency markets.

This in turn hit European exporters and other stocks that have rallied this year from the euro's relative weakness, such as automakers, and travel and tourism companies.

Some traders said the volatile market conditions were such that they would rather play it safe by selling out on any stock market rally, rather than buy into any pullback on the market.

"People are scratching their heads as to why the bond yields have suddenly shot up. I'm looking to sell on any rally in this environment," said Darren Courtney-Cook, head of trading at Central Markets Investment Management.

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

Today's European research round-up (Editing by Alison Williams)