* STOXX 600 down 0.1 pct
* easyJet slumps after guidance
* European banks recover (Adds detail, quote and updates prices)
By Kit Rees
LONDON, Oct 6 (Reuters) - European shares retreated onThursday after easyJet dropped to its lowest in morethan three years, although the beaten-down banking sector rose for the third straight session.
The STOXX 600 index fell 0.1 percent after openingin positive territory, extending the previous session's losses,when both shares and bonds were hit by worries that the EuropeanCentral Bank might wind down the pace of bond-buying before theend of its asset-purchase programme.
Budget airline easyJet was the biggest laggard, down over 6percent after saying that its annual profit would fall by morethan 25 percent this year, its first drop since 2009. It citeddisruptions, security concerns and an adverse exchange rate.
Shares in rivals IAG and Ryanair both fellmore than 2 percent.
"Despite easyJet's strong margins ... and attractivestrategic positioning, we see negative EPS momentum as thedominant driver for the shares in the short term," analysts atLiberum, who have a "sell" recommendation on the stock, said ina note.
"Given the seasonality of easyJet and the airline industry,we see it as unlikely there will be a positive catalyst muchbefore summer next year."
European banking stocks, however, extended theirgains from the previous session. Deutsche Bank rose 1percent after German officials said that the government waspursuing discreet talks with U.S. authorities to help the lendersecure a swift settlement over the sale of toxic mortgage bonds,according to sources in Berlin.
Unicredit shares rose 2 percent. Both DeutscheBank and Unicredit have roughly halved in value this year.
"You can maybe see a little bit of repositioning, peoplebuying into some of these banks that are offering a fair bit ofa discount in anticipation of ... when the ECB starts turningthe tap off," Dafydd Davies, partner at Charles HanoverInvestments, said.
Osram jumped nearly 10 percent to a record high onreports of a takeover offer from Chinese chipmaker SananOptoelectronics Co Ltd.
German chipmaker Dialog Semiconductor also rallied5.4 percent after reporting a solid set of preliminarythird-quarter results. (Reporting by Kit Rees; Editing by Vikram Subhedar, Larry King)
easyJet (EZJ)