By Blaise Robinson

PARIS, Jan 11 (Reuters) - European stocks fell to their lowest since December 2006 by midday on Friday, tracking a drop in U.S. futures on renewed worries over the troubled subprime mortgage market, with consumer product shares hurt by brokerage downgrades.

Unilever <ULVR.L> sank 5 percent after Morgan Stanley cut its recommendation to "underweight". France's L'Oreal <OREP.PA>, the world's largest cosmetics group, tumbled 4.8 percent after Deutsche Bank lowered its rating to "sell", citing mounting pressure on margins from rising commodity prices and risks of a slowdown in consumer spending.

At 1255 GMT, the FTSEurofirst 300 <.FTEU3> index of top European shares was down 0.5 percent to 1,429.15, after falling to as low as 1,420.90 -- retreating for the sixth time in eight sessions.

After posting a thin 1.6 percent gain in 2007, its worst annual performance since 2002, the index has already lost 5.1 percent in 2008, hammered by mounting worries over the prospect of a U.S. recession.

"The market is in the process of pricing in a U.S. recession, turning into bear mode, with more forecast downgrades looming," said Jean-Luc Buchalet, strategist at FactSet in Paris.

"Defensive stocks have been showing some resilience, such as telecoms and pharmaceuticals, while all the other sectors are just sinking," he said.

"If the U.S. economy tips into a recession, Europe's growth will clearly suffer and unemployment will rise. But equities were not overvalued at the beginning of this retreat, so stocks might continue to fall, but not as sharply as they would in a full-blown recession."

The DJ Stoxx European food and beverage index <.SX3P> was down nearly 4 percent on Friday, with Danone <DANO.PA> losing 3.6 percent, Pernod Ricard <PERP.PA> shedding 4.5 percent and Nestle <NESN.VX> falling 4 percent.

Cadbury Schweppes <CBRY.L> fell 4.5 percent on market talk that the confectionery and beverage group would issue a profit warning, according to traders. Cadbury Schweppes had no immediately comment.

"The European beverages sector trades at a 45 percent forward P/E premium to the market, which we believe is justified by the defensive nature of the sector. However we would not expect sector earnings to remain unscathed from the slowdown in mature market consumer spend," JPMorgan said in a note.

"We think consensus estimates may be too high and see scope for some sector multiple contraction should equity markets recover in 2008. We think emerging markets, along with restructuring and continuing M&A, can support double digit earnings growth but believe risks are skewed to the downside."

Heineken <HEIN.AS> was down 4.3 percent. Its chief executive refused to rule out a higher bid by the Dutch brewer with Carlsberg <CARLb.CO> for Britain's Scottish & Newcastle <SCTN.L>. Carlsberg was down 2.2 percent and Scottish & Newcastle was up 1.7 percent.

MORE CREDIT JITTERS

Reports of bigger-than-expected subprime-related losses at Merrill Lynch <MER.N>, suggesting the credit crisis that has hit equity markets worldwide since July was far from over, also added to the gloomy sentiment on Friday.

Citing people who had been briefed on Merrill's plans, the New York Times said the investment bank is expected to suffer $15 billion in losses stemming from soured mortgage investments.

The report about Merrill came on the heels of a profit warning from American Express Co <AXP.N>, the second U.S. credit card company to slash its profit outlook this week.

European banks were mixed, with HSBC <HSBA.L> down 0.7 percent, and Deutsche Bank <DBKGn.DE> up 0.4 percent.

"Looking forward, we will still see some stocks outperforming, particularly the ones with a big exposure to emerging markets, as well as U.S. companies benefiting from a low dollar, but that will be about 20 percent of the market, while the remaining 80 percent will languish," Buchalet said.

Around Europe, Germany's DAX index <.GDAXI> was up 0.2 percent, UK's FTSE 100 index <.FTSE> down 0.5 percent and France's CAC 40 <.FCHI> down 0.5 percent.

French industrial power and transport equipment maker Alstom <ALSO.PA> rose nearly 6 percent following an upgrade from Goldman Sachs to "neutral" from "sell" and on hopes the firm could seal a large train contract in Italy. (Editing by Paul Bolding) (([email protected] ; +33 1 4949 5269, Reuters Messaging: [email protected]))

Keywords: MARKETS EUROPE STOCKS

 
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    For rolling updates on what is moving European shares  
    please click on [STXNEWS/EU] 
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 For pan-Europeanmarket data and news, click on codes in  
 brackets: 
 European Equities speed guide...................<EUR/EQUITY> 
 FTSEurofirst 300 index..............................<.FTEU3> 
 DJ STOXX index......................................<.STOXX> 
 Top 10 STOXX sectors...........................<.PGL.STOXXS> 
 Top 10 EUROSTOXX sectors......................<.PGL.STOXXES> 
 Top 10 Eurofirst 300 sectors...................<.PGL.FTEU3S> 
 Top 25 European pct gainers.......................<.PG.PEUR> 
 Top 25 European pct losers........................<.PL.PEUR> 
    Main stock markets: 
 Dow Jones...............<.DJI>  Wall Street report .....[.N] 
 Nikkei 225.............<.N225>  Tokyo report............[.T] 
 FTSE 100...............<.FTSE>  London report...........[.L] 
 Xetra DAX.............<.GDAXI>  Frankfurt market stories[.F] 
 CAC-40.................<.FCHI>  Paris market stories...[.PA] 
 World Indices......................................<0#.INDEX> 
 Reuters survey of world bourse outlook..........<EQUITYPOLL1> 
 Western European IPO diary...........................[WEU/IPO] 
 European Asset Allocation.........................[EUR/ASSET] 
    Reuters News at a Glance: Equities...............[TOP/EQE] 
    Main currency report:...............................[FRX/] 
  Keywords: MARKETS EUROPE STOCKS/ =2