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* UK stocks lag after new job protection plan underwhelms

* German, French business morale improves in Sept

* Italian banking stocks surge 1.3%

Sept 24 (Reuters) - European stocks slid on Thursday, with UK markets leading the way after Britain's government launched a scaled-back job support programme, while a second wave of COVID-19 cases across the continent dampened investor sentiment.

The pan-European STOXX 600 index fell 1.0% to close at its lowest level since Aug 3, with the retail, oil & gas and financial services sectors falling the most.

Investor fears about the resurgence of COVID-19 denting the European economic recovery have dominated trading this week as the UK, Spain and France imposed fresh restrictions, while U.S. Federal Reserve policymakers spooked markets on Wednesday by calling on the government to provide more fiscal support.

"Investor's expectations for a slow steady recovery have been tested in this month," Geir Lode, head of global equities, international at Federated Hermes wrote in a note.

"With the recent sentiment change in the market, it should be remembered that market volatility still exists. Exceptionally low interest rates and ample liquidity give investors few choices other than to invest in riskier assets."

M&A speculation drove a 1.3% rise in Italian banking stocks , while the European banking index slipped 0.4%.

Italy's third-largest bank Banco BPM jumped 5.8% and Credito Valtellinese surged 11.6%, with traders citing a Bloomberg report that suggested talks of possible takeover interest from French bank Credit Agricole.

Earlier, a Banco BPM spokeswoman said it was not in contact with bigger rival UniCredit over a potential merger, dismissing a press report. UniCredit rose 2.3%.

The STOXX 600 had cut losses earlier in the session after surveys showed business morale in Germany and France improved for the fifth month in a row in September, suggesting that both countries are set for strong growth in the third quarter.

The relief, however, proved temporary, with U.S. markets hesitating to rise after a surprise rise in weekly jobless claims.

The German DAX was down 0.3%, outperforming the regional indexes, while France's CAC 40 fell 0.8%.

UK's FTSE 100 lagged with a 1.3% drop, failing to draw cheer from a new job support plan. Under the "more targeted" programme, Finance minister Rishi Sunak said government support would only be available to workers whose employers keep them on at least a third of their normal hours.

British cinema operator Cineworld slumped 14.8% as it swung to a loss and said it may have to raise more money if pushed to shut its theatres again due to government curbs on social gathering. (Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak Dasgupta, Kirsten Donovan)