* FTSEurofirst 300 down 0.5 pct; falls for third session
* Financials among top decliners; sector index down 2.4 pct
* Risk appetite drops on U.S. debt talk impasse
By Atul Prakash
LONDON, July 27 (Reuters) - European shares fell on Wednesday as a deadlock over raising the U.S. debt limit raised concerns about a possible default and a downgrade of the country's top-notch credit rating, prompting investors to cut their exposure to riskier assets.
The Euro STOXX 50 volatility index , one of Europe's main barometers of sentiment, rose 6.5 percent, indicating a decline in investors' desire to buy equities.
Banks were among the top losers, with UniCredit falling 5.1 percent and the STOXX Europe 600 banking index down 2.4 percent. The index has fallen about 7 percent in less than a week and is down more than 10 percent this year.
Goldman Sachs downgraded European banks to "neutral" from "overweight" after last week's bounce, saying doubts over the latest rescue package for Greece have started to emerge after initial optimism.
The FTSEurofirst 300 index of top European shares fell for a third straight session. At 0817 GMT the index was down 0.5 percent at 1,094.92 points after falling 0.3 percent in the previous session. It is down 2.2 percent this year.
"Nervousness and volatility will probably be our companion for the second half of the summer," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
"Our base scenario is still that some sort of eleventh hour deal will be reached. However, there is always a risk that they do not come to a compromise. The impact would be formidable and the U.S. economy may not be strong enough to take this," he said, referring to the U.S. debt talks.
Deeply divided Republican and Democrat leaders are scrambling to find common ground with less than a week before the government hits its borrowing limit approved by Congress. A downgrade of U.S. credit rating would raise its borrowing costs and hurt economic recovery.
The chances of a quick resolution narrowed after a vote on a deficit plan from the top Republican in Congress was pushed back to Thursday from Wednesday.
"There is a very simple logic that higher bond yields are bad for economic growth and yet all the politicians are refusing to budge on this issue. The politicians are underestimating the fire that they are playing with," said Richard Greenwood, fund manager at Bedlam Asset Management, which manages $700 million.
"I see equities moderately attractive in the medium term, with a lot of interesting opportunities within the market. I expect more upward pressure on gold prices, so gold miners would be a favoured sector," he said, adding the fund company raised its exposure to the precious metals sector about two weeks ago.
Gold prices , generally seen as a safe-haven asset, hit a record high on Wednesday for the sixth time in two weeks.
EURO ZONE CRISIS
Investors also remained cautious following persistent worries about the euro zone debt crisis. German Finance Minister Wolfgang Schaeuble said Berlin was against a carte blanche for the euro zone's rescue fund to purchase bonds on the secondary market.
In reaction, Spanish and Italian government bond yields rose. Schaeuble's remarks added to investor worries about whether a new Greek bailout plan agreed last week would be enough to stop the spread of contagion to bigger euro zone economies. .
Spains' IBEX 35 index fell 1.8 percent, while Italy's FTSE MIB lost 2.6 percent and regional banks lost ground, with the Thomson Reuters Peripheral Eurozone Banks index down 4.1 percent and the FTSE Greek banks index down 2.4 percent.
The Euro STOXX 50 , the euro zone's blue-chip index, fell 1.1 percent to 2,710.44 points. The index had formed a bullish pattern on the weekly candlestick chart last week, indicating some potential for recovery.
However, the gap at 2,790 proved to be a strong resistance and needed to be closed in order to confirm the bullish view. The index is trading below its 20-day moving average and found some support around 2,711.
"If broken, the next support levels will be at 2,682 and 2,636. It is likely that the index will suffer more losses to either of these levels before forming a short-term bottom and closing the gap," RBS technical analyst Dmytro Bondar said.
Meanwhile the Stoxx 600 Europe auto sector index
fell 1.4 percent on worries about vehicle demand. Daimler
Miners, however, were in demand as copper rose on supply worries following a strike at the world's larget copper mine in Chile. The sector index rose 0.6 percent.
Among individual movers, ArcelorMittal gained 1.9 percent after the world's largest steelmaker beat second-quarter profit expectations. (Edited by Greg Mahlich)
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