January 13, 2020 / 10:09 AM / 6 months ago

UPDATE 3-Carmakers and banks drag on European markets, London outperforms

(For a live blog on European stocks, type LIVE/ in an Eikon news window)

* U.S.-China trade deal to be signed this week

* Automakers fall on prospect of weak China demand

* Renault also hit by worries over Nissan alliance

* Weak UK economic data fuels rate-cut expectations (Updates to close)

By Susan Mathew

Jan 13 (Reuters) - European shares fell on Monday as carmakers took a hit from a Chinese sales forecast while the London market outperformed after weak economic data raised expectations of a Bank of England rate cut.

Auto stocks broke a four-day winning run to fall 0.9%. Renault led the fall, hitting a six-year low as investors worried that the French company's 20-year cost-sharing alliance with Nissan could collapse without Carlos Ghosn to hold it together.

The China Association of Automobile Manufacturers (CAAM)earlier reiterated that auto sales are likely to shrink for a third consecutive year in 2020, damaging the outlook for European carmakers in one of their most important markets.

"We think autos are going to remain a drag for the foreseeable future, but we see tentative signs of (China demand), if not getting better, at least taking a pause from getting worse," said Andrea Cicione, head of strategy at TS Lombard.

Germany's DAX index, heavy with auto and parts exporters, registered a 0.2% decline as it retreated slightly from the close to two-year high hit in the previous session.

A slide in bank stocks ensured Italy and Spain led losses among regional peers.

After finishing last week up around 0.2%, the benchmark European STOXX 600 index slipped 0.2% to extend losses to a second session despite a rally in global markets.

The index is down 0.3% from record highs last week, when the mood was brightened by easing tensions between Washington and Tehran and the prospect of the United States and China signing a Phase 1 trade deal this week. "Equity markets have gained major ground in recent months on the back of the trade story, and now it seems that traders are content to sit on the hands until the agreement has been made official," said David Madden, market analyst at CMC Markets UK.

European markets could also be catching up with a bit of weakness in the U.S. market on Friday, said TS Lombard's Cicione. U.S. markets fell on Friday after lower than expected December U.S. jobs growth.

Meanwhile, data on Monday showed Britain's economy grew at its weakest annual pace in more than seven years in November, raising expectations that the Bank of England will cut interest rates this month.

Britain's mid-cap index closed 0.7% up while a dip in the pound supported a rally by internationally focused stocks that helped the blue-chip index to firm by 0.4%.

Top gainer on the STOXX 600 was utility Pennon Group after it said all options were being considered in response to a report that KKR had made a bid for its waste-management business.

Rating upgrades, meanwhile, pushed up shares of Avast , Tullow Oil, Publicis and BAE Systems .

Reporting by Susan Mathew and Ambar Warrick in Bengaluru; Editing by Catherine Evans and David Goodman

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