* Deutsche Bank leads banking sector lower after results
* BP weighs on sector after results
* Drugmakers, Lagardere lend some support
By Dominic Lau
LONDON, July 28 (Reuters) - European shares fell on Tuesday after hitting their highest close for 8-1/2 months in the previous session, as Deutsche Bank led banks lower and BP's results put pressure on energy stocks.
Weak U.S. consumer confidence also weighed on the market and overshadowed news that U.S. single-family home prices rose in May from April, the first monthly rise in nearly three years.
U.S. consumer confidence fell more than expected in July, the Conference Board said, recording its second consecutive decline as sentiment remained hampered by a difficult job market.
The FTSEurofirst 300 index of top European shares closed down 1 percent at 902.85 points. Volumes on the index were about 87 percent of the 90-day daily average.
Banks were among the worst hit. Deutsche Bank sank over 11 percent after it raised its loan loss provisions in the second quarter, overshadowing a nearly 70 percent rise in net profit driven by its investment banks.
BNP Paribas, Credit Suisse, UBS, Royal Bank of Scotland and Deutsche Postbank lost between 2.8 and 5.5 percent.
However, BBVA advanced 4.5 percent after reporting its core capital rose to 7.1 percent in the first half, supporting the bank's recent declarations that it had no need for a capital hike.
"The earnings season seems to be better than analysts' expectations on an aggregate level. So far it seems to be because cost cutting has been very effective ... improving profitability despite declines in sales on top line," said Mark Bon, a fund manager at Canada Life.
"There is some expectation that once you have this phase of cost cutting there is a return of some top line growth from refilling the inventory pipeline, an increase in sales," he said, adding that it would be an importance phase for the market to return to healthy earnings growth though it could be a long process.
The FTSEurofirst 300 has gained 40 percent since reaching a lifetime low in early March, and is up 8.5 percent for the year.
Oil producers were other standout losers after BP said it had increased its cost reduction targets for 2009 by 50 percent to $3 billion but reported a halving in second-quarter profits due to lower oil prices and weaker refining margins.
BP was 3.1 percent lower, while BG Group, Total and StatoilHydro lost 2.1-2.8 percent.
Miners were also weaker, with Xstrata down 6.5 percent despite posting solid first-half production numbers. Anglo American, BHP Billiton, Rio Tinto and Eurasian Natural Resources fell 3.1-6.9 percent.
"There is a little bit of rotation into stocks which lagged behind and a little bit of profit taking on things that have run very well recently," Bon said. "It's a good development, as even stocks that have lagged behind have the chance to be bought as well."
Across Europe Britain's FTSE 100 shed 1.3 percent -- ending a record-equalling 11th-day winning run, Germany's DAX and France's CAC 40 lost 1.5 and 1.2 percent, respectively.
LAGARDERE, DRUGMAKERS SUPPORT
Lagardere soared more than 5 percent amid news that the media group had been provisionally cleared by France's stock market regulator in a long-running probe into suspected insider trading at Airbus parent EADS.
EADS, which Lagardere owns 7.5 percent, gained 2.3 percent, benefiting from solid second-quarter results.
Defensive drugmakers offered some support, with Novo Nordisk , Roche, GlaxoSmithKline, Merck KGaA and Sanofi-Aventis up 0.7-3.1 percent.
"There is this sentiment in the market about the glass being half full -- but there is a big gap between the euphoria and reality, a bit like a supermodel without make-up," said Commerzbank's chief strategist, Hans-Juergen Delp.
"Earnings expectations have been lowered so much that they are easily exceeded." (Additional reporting by Joanne Frearson and Christoph Steitz; Editing by Greg Mahlich)