June 10 (Reuters) - European shares fell on Monday, with French stocks hit after President Emmanuel Macron called a snap election following a heavy trouncing of his allies in European Union parliamentary elections.
France's blue-chip CAC 40 index (.FCHI), opens new tab fell 1.4% to touch a more than three-month low, with lenders, including BNP Paribas (BNPP.PA), opens new tab, Societe Generale (SOGN.PA), opens new tab and Credit Agricole (CAGR.PA), opens new tab, falling by between 3.6% and 7.5%.
French bond prices also fell , pushing yields on the 10-year note to their highest level in more than six months after eurosceptic nationalists made gains in European Parliament elections on Sunday.
Macron's unexpected decision to call an election could hand major political power to the far right after years on the sidelines, putting Marine Le Pen's National Rally (RN) party in charge of the domestic agenda, including economic policy.
"The European election results raise the possibility of RN becoming the largest group in the French parliament," economists at HSBC noted.
"If RN gains an absolute majority at the National Assembly, President Macron could be forced into a 'cohabitation' period and might have to appoint a prime minister from RN."
Shares in French motorway operators Eiffage (FOUG.PA), opens new tab and Vinci (SGEF.PA), opens new tab fell by more than 5% while airports group Aeroports de Paris (ADP.PA), opens new tab and energy firm Engie (ENGIE.PA), opens new tab shed 4.1% and 3.2%, respectively.
The pan-European STOXX 600 index (.STOXX), opens new tab fell 0.4%, with other regional markets, including Germany's DAX (.GDAXI), opens new tab and Spain's IBEX (.IBEX), opens new tab down 0.4% each.
Most STOXX 600 sectors traded lower, with euro zone banks (.SX7E), opens new tab the worst hit with a 1.6% drop, while oil and gas (.SXEP), opens new tab was an outlier gaining 0.9% tracking higher crude oil prices.
Equity markets came under pressure on Friday after a stronger-than-expected U.S. jobs report fanned worries that the Federal Reserve would not cut interest rates anytime soon.
On the other hand, the European Central Bank lowered its key rate by 25 bps from a record high to 3.75% at its policy meeting last week, but traders scaled back bets of two more rate cuts this year after it gave little hint of further moves.
ECB policymaker Peter Kazimir said in a blog post that the central bank should sit out the summer before contemplating another rate cut, while fellow policymaker Joachim Nagel likened the path for interest rates to a mountain ridge rather than a peak.
Among other stocks, UK insurer Aviva (AV.L), opens new tab slipped 1.7% after JPMorgan downgraded the stock to "neutral" from "overweight".
Reporting by Sruthi Shankar and Shashwat Chauhan in Bengaluru; editing by Sohini Goswami and Jason Neely
