* FTSEurofirst down 0.1 pct after dipping below '08 close
* Drugmakers gain; GlaxoSmithKline up on deal news
* Banking, insurance shares lose ground
By Atul Prakash
LONDON, June 23 (Reuters) - European equities inched lower by midday on Tuesday after falling sharply in the previous session, with weaker banks and insurers outpacing positive pharmaceutical and automobile stocks.
Investors traded cautiously on worries that a recovery in the global economy could take longer than expected. Analysts said that the market has paused for a breather following an impressive rally after hitting a record low in early March.
At 1118 GMT, the pan-European FTSEurofirst 300 index of top shares was down 0.1 percent at 836.61 points after briefly falling below the 2008 close of 831.97 points. But it is still up about 30 percent since hitting a lifetime low in March.
Financial shares were among top decliners on the index, with Standard Chartered, Barclays, Lloyds, Societe Generale and Credit Agricole down 1.1-3.9 percent.
However, UBS jumped 3.5 percent after the New York Times reported the U.S. Justice Department may drop a case aimed at forcing the Swiss bank to reveal the names of 52,000 wealthy American clients suspected of tax evasion.
"There is nervousness around the market and these sorts of pullbacks and volatility are likely to continue," said Henk Potts, equity strategist at Barclays Stockbrokers in London.
"The market needs tangible proof that the economic data is truly getting better," he added.
The market continued to get mixed economic indicators. Key surveys showed that a recovery from a severe recession in the euro zone's services sector stalled in June as consumers remained nervous, but factories fared better.
A Chinese central bank official said that the country's economy was headed in the right direction, but the foundations of the recovery were not yet solid, adding to a chorus of voices cautioning against expectations of a rapid rebound from the global crisis.
The U.S. unemployment rate -- at 9.4 percent, already its highest in about 25 years -- is likely to hit 10 percent in the next couple of months, a White House spokesman said on Monday.
"After the massive three-month rally that sent all major indexes significantly higher, we are now in the middle of the long-awaited pullback," Close Brothers Seydler said in a note.
"Market participants start to realise that the recovery in the economy and earnings is unlikely to be as strong as the rise in stock prices since early March."
INSURERS DOWN, PHARMA UP
Insurers also lost ground, with Swiss Life, Legal and General, Aegon and Prudential down 1.9-5.8 percent.
Drugmakers advanced, however, with AstraZeneca, Merck, Novartis and Shire all up 1-2.5 percent.
GlaxoSmithKline rose 1.8 percent. The company has signed a deal with Chroma Therapeutics, giving it access to the unlisted British biotech company's experimental compounds for inflammatory diseases such as rheumatoid arthritis.
Automakers were also higher. BMW, Daimler AG, Porsche, Volkswagen AG and Peugeot were up 0.4-3.1 percent.
Shares in Anglo American fell 1.3 percent after the mining group rejected a merger proposal from rival Xstrata. Xstrata shares fell 1.3 percent.
Anglo American trimmed some early losses after dealers cited market talk of bid interest from China's state-owned Chinalco. A Chinalco spokesman in Shanghai said the company was unaware of the bid talk, while Anglo American declined to comment.
Later in the day, investors will focus on U.S. housing data at 1400 GMT.
Eyes will also be on the U.S. Federal Reserve central bank, whose Federal Open Market Committee (FOMC) begins its two-day meeting on interest rate policy. (Additional reporting by Peter Starck; editing by Simon Jessop)