MILAN (Reuters) - European shares dipped in early trading on Friday after the Italian government agreed to set a higher than expected budget deficit target that could put Rome on a collision course with Brussels.
Shares in Italian banks, whose big sovereign bond portfolios makes them sensitive to political risk, bore the brunt of selling pressure, down 5 percent, while government bonds sold off and were set for their worst day in over three months.
The pan-European STOXX 600 <.STOXX> index was down 0.3 percent by 0717 GMT but was still on track for a small weekly gain, its third in a row. Italy's FTSE MIB <.FTMIB> index fell 1.9 percent, while Germany's DAX <.GDAXI> dipped 0.4 percent.
"The deficit number is higher than expected and that clearly is not a good sign. All the attention will now shift to rating agencies ... Meanwhile, it's difficult to imagine that Italian stocks will perform well," said Gilles Guibout, portfolio manager at AXA IM in Paris.
Italy's government on Thursday targeted the budget deficit at 2.4 percent of gross domestic product for the next three years, defying Brussels and marking a victory for party chiefs over economy minister Giovanni Tria, an unaffiliated technocrat.
Financials weighed heavily on the STOXX 600, dragged down by losses among Italian banks.
Elsewhere, RSA Insurance <RSA.L> reported a small rise in net written premiums for the year so far, but said higher weather losses in Britain led to a "disappointing" third quarter. Its shares fell 8.7 percent.
Swedish aerospace company Saab <SAABb.ST> rallied 6.8 percent boosted by news its partner Boeing had won a $9.2 billion contract with the U.S. Air Force.
(Reporting by Danilo Masoni. Editing by Jane Merriman)