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European shares fall led by utilities, real estate; Tesco soars

* STOXX 600 closes down 0.6 pct

* ECB taper talk weighs on markets

* Utility and property stocks fall as bond yields rise

* But bank stocks edge up, lifting Milan and Madrid markets

By Danilo Masoni

MILAN, Oct 5 European shares fell on Wednesday on concerns that the European Central Bank might reduce the pace of bond-buying before its asset purchase programme ends, hitting utility and property stocks hardest.

The pan-European STOXX 600 index ended down 0.6 percent. The index is down by around 6 percent so far in 2016.

Bloomberg News reported late on Tuesday that the ECB will probably gradually wind down its bond purchases before it concludes its quantitative easing (QE) programme.

An ECB spokesman later tweeted that the euro zone's central bank had not discussed reducing the pace of monthly purchases. The scheme is due to run until March next year and many analysts expect it to be extended given that inflation remains low.

But the mere possibility of a scaling-back or "tapering" of the scheme was enough to rattle markets already questioning whether central banks can win the battle to boost growth and inflation, and whether governments should do more themselves.

"No doubt ECB QE won't go on forever, but at the same time QE has still a bit to run and ... it might be premature to assume that the ECB has made any decision regarding QE going forward," said Markus Huber, a trader at City of London Markets.

Euro zone bond yields soared, which in turn weighed on European utility and property stocks. Such sectors typically underperform when bond yields rise, as that leads to higher borrowing costs for utility and real estate companies which often have large levels of debt.

The STOXX Europe 600 Real Estate index fell 2.9 percent while the STOXX Europe 600 Utilities index shed 2.1 percent.

The move up in bond yields eased some of the selling pressure on European banks, however, as higher bond yields can mean that banks make more money in their lending business.

The STOXX Europe 600 Banks index rose 1.4 percent, although the index remains down by around 20 percent since the start of 2016, partly on concerns over bad debts in the sector.

Milan's FTSE MIB and Spain's IBEX equity indexes, which are dominated by banking stocks, also rose by 1 percent and 0.1 percent respectively.

Deutsche Bank, whose shares slumped to record lows last week, also rose 2.8 percent, as credit rating agency Moody's said it had a "stable outlook" on the German banking system.

"Solid operating conditions in Germany help to balance the effect of the low-yield environment on the country's banks," said Andrea Wehmeier, a vice president and analyst at Moody's. (Additional reporting by Sudip Kar-Gupta; Editing by Catherine Evans)

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