Italy crisis taints quarter-end for European shares

* FTSEurofirst 300 down 2.99 points at 1,254.54

* Italy's FTSEMib (Milan: FTSEMIB.MI - news) down on concerns over political stability

* U.S. debt worries taint quarter-end for equities

* Tenaris (Milan: TEN.MI - news) falls after BofA ML downgrade

* European shares end quarter up near 12 percent

By David Brett

LONDON, Sept 27 (Reuters) - Italy's political crisis helped drag equities lower on Friday which, combined with U.S. debt worries, saw European shares close the third-quarter of 2013 on a sour note.

The crisis in Rome, which is threatening economic reform in the country and could hit euro zone's fragile recovery, led on Friday to Italy paying the highest yield since June to borrow over 10-years, a spike which sent Italian equities down 0.9 percent.

Tenaris, the Milan-listed oil services firm was the top individual faller in Europe, down 4 percent, also weighed on by BofA Merrill Lynch's downgrade of the company to "neutral" from "buy".

"It is highly probable that this (Italian) government has a short life," Nicola Marinelli, fund manager at Glendevon King Asset Management, said.

"(However) I do not think that all this is going to have a major impact; so weakness on headline news could be used to add positions to Italian government bonds and Italian corporate bonds and equities."

The broader STOXX Europe 600 index fell 0.2 percent to 312.29 points, taking some of the gloss off a quarter which has seen European shares rise nearly 12 percent and outperform stocks in the United States, boosted by improving economic data.

Stronger economic data helped the index to a five-year high last week and left it trading at 1.7 times its book value, its highest valuation multiple since 2011, Datastream data showed.

The improving macro outlook encouraged U.S. investors to switch into European stocks and out of their domestic market in the seven days to Sept. 25, as the U.S. budget talks and uncertainty over monetary and fiscal policy in the country hampered Wall Street shares.

"Debt ceiling has taken over from tapering as the over-used word of the week and the S&P has accordingly had a soggy end to the month and quarter," said Mark Tinker, fund manager at AXA Framlington, said.

"We saw a sharp spike in the put-call ratio ... which is probably being reflected by the delta hedging desks over the last few days creating some downward pressure on the S&P which is spilling over into other markets," he said.

The Euro STOXX 50 put/call ratio, one of Europe's widely-used gauges of investor sentiment, jumped to a two-year high recently, signaled a sharp rise in investor risk aversion as the market rally lost steam while talks in Washington on raised the U.S. government's borrowing limit loomed.

"If the budget bill is not passed on Monday, it could lead to a government shutdown or the country defaulting from October 1st," Ronnie Chopra, a strategist at TradeNext, said.

"This would cause a shutdown into fourth-quarter economic growth ... as the deadline looms; reality seems to be at last causing concern about the possible negative impact on growth and corporate profitability," he said.

Miners, which are the most exposed to any pull-back in stimulus and waning growth, were the top falling sector on Friday, down 1.7 percent but still up around 20 percent in the quarter.

Every sector in the STOXX 600 boasted gains in the third-quarter with Autos the best performers up nearly 21 percent in the last three months, while travel & leisure the biggest laggards, up around 3 percent, hurt by the rising cost of oil and unrest in the middle-east.

In spite of the current U.S. fiscal tensions, investors remain optimistic on the outlook for equities, according to the latest Halifax Share Dealing Market Tracker survey.

Energy and mining stocks generate the biggest level of likely activity, with over 38 percent of investors saying they plan to increase their holdings, and 7.5 percent saying they plan to decrease holdings in the sectors, the survey said