European shares pegged back by Portuguese worries

Reuters - UK Focus

* Portugal's PSI-20 market falls for 4th session

* FTSEurofirst 300 up 0.2 pct, steadying after Thursday drop

* Take more defensive approach - Sunrise Brokers strategist

* French telecom stocks boosted by merger moves

By Sudip Kar-Gupta

LONDON, May 16 (Reuters) - Portugal's stock market fell fora fourth straight session on Friday on concerns over thecountry's economy, preventing broader European equity indexesfrom making much progress.

The pan-European FTSEurofirst 300 index edged up0.2 percent to 1,360.05 points in late session trading,steadying after a 0.8 percent fall in the previous session thathad knocked the index down off 6-year highs.

The euro zone's Euro STOXX 50 index also rose0.2 percent to 3,168.80 points but Lisbon's benchmark PSI-20index fell 0.6 percent, following on from declinesearlier in the week including a 2.7 percent drop on Thursday.

Traders said the Lisbon market was hit by a 6 percent dropin Portuguese bank Banco Espirito Santo after itannounced a discounted share issue to raise capital.

They added that ongoing concerns over the state ofPortugal's economy, after data on Thursday showed a shock 0.7percent drop in gross domestic product, was further weighing onthe market, while Portuguese bonds also fell onFriday.

"We think there is always another euro zone crisis justaround the corner," HED Capital head Richard Edwards said.

TIME TO GO DEFENSIVE?

Other traders were more confident that the broader, upwardstrajectory of European stock markets remained intact.

The FTSEurofirst 300 remains up by nearly 3 percent sincethe start of 2014, in spite of Thursday's pullback which wastriggered by data that showed a surprise contraction in theeconomies of Portugal and Italy.

Merger activity has also supported European stock marketsthis year, and French telecoms shares such as Iliad (Paris: FR0004035913 - news) andthose of conglomerate Bouygues (Frankfurt: BYG.F - news) - which owns BouyguesTelecom - rose on Friday on new signs of takeover activity inthe sector.

Andreas Clenow, hedge fund trader and principal at ACIESAsset Management, was unconcerned by Thursday's stock marketsell-off and was sticking with "long" positions betting on moregradual gains for European equities.

"So far, I don't see enough damage to the uptrend," Clenowsaid.

However, Sunrise Brokers equity strategist ChristopherMellor backed a more defensive approach to the equity marketsand favoured utility stocks - often preferred for their soliddividend yields - to protect returns in case of any moreprolonged stock market declines.

"We are advocating a more defensive bias," he said.

(Additional reporting by Lionel Laurent; Editing by AlisonWilliams)

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