(Reuters) - European shares fell on Monday in thin trade, dragged down by banking stocks after Unicredit's rocky start to its key rights issue and worries about prospects for the U.S. earnings season.

Aluminium producer Alcoa Inc, a bellwether for the broader economy because of the wide use of aluminium in manufacturing, kicks off the U.S. earnings season after the U.S. close and investors fear growth might be slowing.

We are at a point where we need more fundamental data to push the market higher, said Veronika Pechlaner, a fund manager on the Ashburton European equity fund.

Alcoa is kicking off the results season today and we want to know if there will be some earnings relief.

She added that although the latest U.S. economic data such as Friday's strong U.S. jobs data was providing a better macro picture, this still needed to be filtered into earnings.

The pan-European FTSEurofirst 300 index of top shares closed down 0.5 percent at 1,008.69 points after posting its third week of gains last Friday.

UniCredit was the worst performer, down 12.8 percent on the day and taking its fall since last Wednesday - when it spooked the market by pricing a rights issue at a huge discount - to 45.2 percent.

Volume in Unicredit was five times its 90-day daily average.

UniCredit reinforces the negative sentiment in the sector and highlights the capital raising needs of some of the banks, Pechlaner said.

We have been reducing our exposure to financials, she said.

Concerns about the euro zone debt crisis also weighed on investors after German Chancellor Angela Merkel and French President Nicolas Sarkozy warned that it would not be possible to pay out the next aid tranche to Greece without rapid progress on its second rescue package.

Santander, earlier a standout gainer by more than 2 percent after it met a new core capital target demanded by regulators, fell back as sentiment soured.

Investors were also wary ahead of a Spanish and Italian bond auction later in the week, with 10-year Italian bond yields above 7 percent, a level deemed unsustainable.

The near-zero growth or recession in many European countries is preventing the return of investor confidence despite the additional austerity measures announced recently, said Franklin Pichard, director at Barclays France.

The vicious circle continues: what's saved with austerity measures dampens economic growth ... In the next few days, people will focus on the ability of Spain and Italy to tap the bond market.

Volume was low for the FTSEurofirst 300 index index, at only two thirds of its 90-day daily average, making trade choppy, while technical factors also influenced trade.

Short-term traders sold out of positions when the intraday chart for the index showed the 14-day Relative Strength Index at or near 70. Values above 70 indicate the market is 'overbought'.