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* Euro zone contraction eased in May but still sharp - PMI
* Lufthansa in talks for state rescue deal, shares jump
* Sweden, Denmark, Norway markets closed (Updates to market close)
By Sruthi Shankar
May 21 (Reuters) - European shares fell on Thursday, as signs of worsening U.S.-China relations added to concerns over the pace of recovery from the coronavirus-led economic downturn.
The pan-European STOXX 600 ended 0.8% lower in a volatile session, with trade-sensitive German and French indexes falling more than 1% each.
Ties between China and the United States have soured as Washington accused Beijing of mishandling the coronavirus outbreak, stalling a market recovery in recent weeks.
U.S. Secretary of State Mike Pompeo took fresh aim at China on Wednesday, calling the $2 billion it has pledged to fight the pandemic "paltry". A Beijing official said China will not flinch in the face of rising tensions.
Meanwhile, a survey released earlier showed the pandemic's devastating effect on the euro zone economy abated a little in May as lockdowns were eased, but was still a long way from marking growth.
After hitting rock bottom in April, IHS Markit's Flash Composite Purchasing Managers' index recovered to 30.5 from April's 13.6, but was still far below the 50 mark separating growth from contraction.
"We believe markets are priced to perfection on the expectation that there is only smooth sailing," strategists at Cantor Fitzgerald wrote in a note.
"Should (COVID-19) cases remerge, it will remind investors that the path back to growth will be slow and bumpy. Add to that the National Congress meeting in China amid boiling U.S.-China tensions."
Stock markets globally have made headway this week, with optimism over easing of lockdowns and talks of more stimulus for the battered euro zone pushing the STOXX 600 to its strongest close in three weeks on Wednesday.
However, banks, oil & gas and technology companies were the biggest drags on the index on Thursday as risk appetite took a hit.
Amsterdam-based telecoms and cable group Altice Europe NV slumped 13.8% after posting a worse-than-expected first-quarter core profit.
Premier Inn owner Whitbread Plc tumbled 13.4% after it said it would seek 1.01 billion pounds ($1.2 billion) in fresh cash from shareholders to help weather the COVID-19 crisis.
Airline stocks found relief as Lufthansa rose 2.7% amid talks with the German government over a rescue deal worth up to 9 billion euros ($9.9 billion), including the state taking a 20% stake.
British low-cost airline easyJet gained 4.4% after saying it would restart a small number of flights on June 15. (Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak Dasgupta, Kirsten Donovan)