By Helen Reid
LONDON (Reuters) - Weakness in bank stocks dragged European shares lower on Thursday as the financial sector caught the cold from U.S. and Asian trading after a less hawkish than expected tone from the U.S. Federal Reserve.
The Fed raised rates, as widely expected, but banks fell in Europe as cautious comments from Chair Janet Yellen on persistently low inflation shook investor confidence in financial stocks.
They dragged Europe's STOXX 600 (STOXX) down 0.2 percent, while euro zone blue chips (STOXX50E) fell 0.1 percent.
"It's really the Fed driving the movement today. It was a pretty dovish rate hike and wasn't voted through unanimously," said Rory McPherson, head of investment strategy at Psigma Investment Management.
"Bond yields all dropped on the back of it, which is bad for banks."
HSBC (L:HSBA), Santander (MC:SAN), Credit Suisse (S:CSGN) and UBS (S:UBSG) were the biggest drags to the STOXX.
The weakness in financials put the brakes on a developing shift in investors' preferences from tech stocks into sectors more likely to benefit from rising rates.
"I don't think the rally in tech is over, but tech is up 20 percent more than the next best sector so you're getting profit-taking," said McPherson. "Banks are just a lot cheaper in a world where everything is quite expensive."
Tech was the worst-performing sector, with chipmakers Dialog Semiconductor (DE:DLGS) and ASML (AS:ASML) down 2.9 and 0.5 percent.
The sector was also weighed by French technology consultancy Atos (PA:ATOS) which fell 2.8 percent after Gemalto (AS:GTO) rebuffed a takeover offer.
Despite being heavily weighted towards financial stocks, Italy's FTSE MIB (FTMIB) rose 0.3 percent, bouncing back after heavy losses in the previous session due to resurfacing political worries.
Attention was turning to central bank meetings later on Thursday, with the Bank of England and European Central Bank both expected to keep rates on hold.
Investors will be scrutinising forward guidance from ECB chief Mario Draghi.
"Any suggestion that (the ECB's) bond buying program is running out of steam, or that September is going to be targeted as an end... all the language around that will be quite key," said Psigma's McPherson.
On the corporate front, the latest twist in South African retailer Steinhoff's accounting woes sent its Germany-listed shares down 6.7 percent as it said it would have to restate 2016 financial results.
Among gainers, wind turbine maker Vestas Wind (CO:VWS) jumped 5.9 percent, with its Spanish peer Siemens Gamesa (MC:SGEN) up 2.9 percent, with a change to the U.S. tax reform package giving the sector a boost.
An original Senate proposal for an Alternative Minimum Tax, which would have jeopardized a tax credit renewable energy firms benefit from, was scrapped as a deal between congressional Republicans was reached on Wednesday.
Dassault Aviation (PA:AVMD) shares fell 2.2 percent after the firm said it planned to axe and relaunch its Falcon 5X jet after engine delays.
Safran (PA:SAF), which provides the Silvercrest engines, fell 2.4 percent.
(For a graphic on 'European benchmarks performance 2017' click http://reut.rs/2ksTtxV)