(Reuters) - European shares tracked Wall Street into the red in light trade on Wednesday, with auto makers the steepest fallers as investors cashed in on a recent rally.

The FTSEurofirst 300 index, which had risen 3.5 percent in the week to Christmas, closed 0.7 percent lower at 983.32 points, having traded less than 40 percent of its 90-day volume average.

The European gauge had turned higher at mid-session following a successful auction of Italian bonds, but it reversed gains in the afternoon, when Wall Street opened lower and the S&P 500 edged below its 200-day moving average.

On Wednesday, London's FTSE 100 closed down 5 points to 5,507, Germany's DAX closed down 118 points to 5,771, and France's CAC 40 closed 32 points lower to 3,071.

Because we haven't seen very much volume, it's easy to see big corrections on a small amount of trading, James Sheehan, trader at Daniel Stewart, said. We have very little support in the market at the moment because all the buyers are on holiday.

Traders said investors were reluctant to build up positions in such a light market and were still concerned about the lack of visibility on the euro zone crisis.

Highlighting that caution, volatility, as measured by the Euro STOXX Volatility index, rose 7 percent.

These fears reverberated across different asset classes, with the euro hitting an 11-month low against the U.S. dollar, while Italy's 10-year government bond yields bounced back above 7 percent in late trading ahead of a debt auction on Thursday, which could prove challenging in thin market volumes.

In a sign perceived counterparty risk among euro zone banks remained high, interbank lending rates fell for the fifth session running as banks took a record 452 billion euros ($538 billion) at the European Central Bank's first-ever injection of 3-year cut-price loans.

Depressed market conditions in Europe pushed ING Group to scrap a separate trade sale of its Belgian insurance business, worth 500 to 750 million euros, a person familiar with the deal said on Wednesday.

Shares in the Dutch financial services group fell 3 percent, underperforming a 1.8 percent weaker European banking index .

CAR CRASH

Automotive stocks were the worst performers, falling 3 percent after a 6.8 percent rally in the previous five sessions, with Germany's Daimler and BMW dropping 3.9 and 3.6 percent respectively.

They weighed on Frankfurt's Dax index, which fell 2 percent after closing below the 50 percent Fibonacci retracement of the Dec.5-Dec.20 movement on Tuesday.

The German blue-chip gauge undeperformed its peers on Wednesday as it broke below the 38.2 retracement of the same move, although it managed to close just above the 23.6 percent level.

Struggling lender Commezbank was bottom of the German chart as it fell 4.2 percent, while Deutsche Bank dropped 3.8 percent to close below its 200-day moving average.

The European travel & leisure sector was a rare outperformer, with London-listed gaming companies leading the charge after the United States Department of justice (DoJ) administration cleared the way for U.S. states to legalise Internet poker and certain other online betting.

William Hill and Ladbrokes rose more than 3 percent on the news, which Numis Securities described as a major change in the U.S. policy on online gaming.

Potentially it opens the way for gambling services to be provided from offshore and this may encourage the U.S. Congress to legislate before the floodgates open, the broker said in a note.

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