By Atul Prakash and Danilo Masoni
LONDON/MILAN (Reuters) - European shares steadied in choppy trade on Tuesday, underpinned by some positive earnings reports after suffering heavy losses in the previous session on persistent concerns over the health of the region's top banks.
The pan-European FTSEurofirst 300, which slumped 3.4 percent on Monday, was up 0.03 percent by 1058 GMT after falling earlier in the day.
Although the market was helped by gains in firms like Vestas that rose 5.9 percent after beating earnings forecasts, sentiment remained fragile. The FTSEurofirst 300 index moved in and out of negative territory several times in morning trading.
"The mood is clearly negative. What is needed is a strong and clear message from the ECB," said Activtrades Chief Market Analyst Carlo Alberto De Casa.
Deutsche Bank shares rose 1 percent after the German bank said late on Monday it had "sufficient" reserves to make due payments this year on AT1 securities. Its shares had slumped 9.5 percent on Monday on concerns about its ability to maintain bond payments.
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However the European banking index fell 0.6 percent, reversing earlier gains and after sinking 5.6 percent a day earlier. Shares in Credit Suisse, UBS, Barclays and UniCredit were all down by between 1 and 3.5 percent.
Analysts said that the banking sector was prone to further weakness in the near term. The cost of insuring bank debt against default climbed on Monday to its highest since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as investors demanded a fatter risk premium over safer German paper, where two-year yields hit record lows.
"The CDS (credit default swap) market is indicating a future financial stress for bond holders in the banking sector. There are concerns that the banking sector is under-capitalised in Europe and credit conditions are sub-optimal," Lorne Baring, managing director of B Capital Wealth Management, said.
"And when combined that with the global macro backdrop, with Chinese growth slowing down, there is a natural impact of it around the world and the banking sector is bearing the brunt. There could be a wave of defaults in the energy sector and that will damage the balance sheet of the banking sector."
Goldman Sachs analysts said that while there were no signs of any strain in terms of euro or U.S. dollar funding in money markets for European banks, market liquidity had nevertheless reduced.
Shares in Sainsbury rose 1.2 percent after the supermarket group posted higher sales, according to data from Kantar Worldpanel.
Investors will pay attention to the testimony of U.S. Federal Reserve Chair Janet Yellen before the House Financial Services Committee on Wednesday, seeking any clue to the strength of the U.S. economy that might underpin the dollar by keeping alive hopes that the central bank may continue on its rate-hiking path.
(Editing by Raissa Kasolowsky and David Evans)