European shares fall most in five months

* Bank shares worst hit as S&P cuts Greece, Portugal ratings

* Portugal benchmark drops 5.4 pct; Greece down 6 pct

By Brian Gorman

LONDON, April 27 (Reuters) - European shares fell at their fastest rate in five months on Tuesday, weighed by ratings agency Standard & Poor's downgrade of Greek and Portuguese debt.

Portuguese equities .PSI20 fell 5.4 percent after S&P cut the country's credit rating by two notches to A- with a negative outlook.

S&P cut Greece's rating to “junk” after the Greek market closed, but before other European bourses closed. Greece .ATG shares fell 6 percent.

The pan-European FTSEurofirst 300 .FTEU3 index of top shares fell 3.1 percent to close at 1,069.16 points, the biggest one-day percentage fall since Nov. 26 and after two straight sessions of gains. The European benchmark is still up more than 65 percent from its lifetime low of March 9, 2009.

Banking stocks were the biggest fallers. BNP Paribas (BNPP.PA), Banco Santander (SAN.MC), BBVA (BBVA.MC), HSBC (HSBA.L), Societe Generale (SOGN.PA) and UBS (UBSN.VX) fell between 2.9 and 7 percent. Greek banks .FTATBNK shed 9.2 percent.

Deutsche Bank (DBKGn.DE) fell 5 percent after delivering record investment bank earnings, with analysts attributing the share price drop to comments that the strong first quarter may not be repeated and a fall in its capital ratios. “It's about risk appetite. The market had focused on bottom-up news, and had got excited about earnings,” said Georgina Taylor, equity strategist, Legal & General Investment Management. “Some of the macro issues have crept in again. There's been a disconnect between what's been going on in credit compared with what's been going on in equities.”

She added: “It's a short-term pullback after a good run. But we could have some setbacks over the next couple of months. ”

S&P downgraded Greek ratings into junk territory on concerns about its ability to implement the reforms needed to address its high debt burden. The agency cut the rating a full three notches to BB-plus, the first level of speculative, or junk, status. The action “results from Standard & Poor's updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory,” S&P said in a statement. European shares had already been lower on worries that an aid package from the European Union and International Monetary Fund might not reach Greece in time for it to avoid default on its debt.

"There is a huge amount of concern over the question of (Greece's) debt. The vacillation by the European Union, the IMF and Chancellor Merkel has just made people extremely nervous,” said David Buik, senior partner at BGC Partners. The cost of insuring against Greek government debt default rose to a record high, as it did for Portugal's debt. On Monday Germany's Chancellor Angela Merkel had said that Greece must commit to further painful savings measures and show that it can return to a sustainable economic path before Germany can approve aid. [ID:nBEB004453]