Shares in French banks fell sharply on Thursday on persistent worries about their outlook, dragging down an index of European bank stocks, which has lost almost 30 percent this year.

Societe Generale shares fell 4.1 percent, giving up an earlier rebound. They lost as much as 23 percent on Wednesday before closing down 15 percent.

BNP Paribas , France's biggest bank, lost 3.6 percent, while the STOXX Europe 600 bank index <.SX7P> fell 0.5 percent, extending the previous session's 6.7 percent drop, which took the gauge to its lowest close since April 2009.

Bank of America-Merrill Lynch cut the sector to neutral from overweight.

Having hung on to a value argument for the banks sector year-to-date, our latest downgrade to global growth expectations makes its difficult to sustain conviction in this argument and we lower our sector weighting to neutral, Merrill strategists said in a note.

As long as EU peripheral debt issues remain in the headlines despite the best efforts of the European Central Bank, banks will likely remain a focal point for negative risk appetite and we believe this will weigh against optically cheap valuations and low investor positioning.

The banking sector has lost more than 29 percent so far this year, the second worst performing segment in Europe, on concerns over the currency bloc's debt crisis and a deteriorating outlook for global growth.

The slide has pushed banks' valuations to the lowest among all 18 STOXX Europe 600 <.STOXX> sectors. European banks carried a 12-month forward price-to-earnings of 7.1 times, versus a 10-year average of 10.9, according to data from Thomson Reuters Datastream.

The FTSEurofirst index of leading European shares <.FTEU3> was flat on the day at 910.49 after trading as low as 905.07.

(Reporting by Dominic Lau, editing by Nigel Stephenson)

BNP Paribas