By Danilo Masoni

MILAN (Reuters) - Tightening financial conditions and the prospect of an economic recession are going to be a toxic brew for European shares going into 2023 with a key regional benchmark seen sliding towards October lows, a Reuters poll has found.

The poll of fund managers and strategists surveyed over the past two weeks forecasts the STOXX 600 equity benchmark to reach 408 points by mid of next year, a near 8% drop from Friday's close.

Even as Europe has joined a recent global stock market recovery, fuelled by hopes of a pause in U.S. interest rate hikes, the STOXX 600 remains on course for its biggest one-year drop since 2018, down around 10% year-to-date.

The impact of aggressive rate hikes will be felt on the real economy and hence earnings growths in the next few quarters. Based on our economists, we expect a shallow recession in Europe which leads to forecast an earnings decline of 12% next year, said Barclays strategist Emmanuel Cau in London.

Graphic: STOXX 600 poll https://fingfx.thomsonreuters.com/gfx/mkt/lbpggnmmrpq/STOXX%20Nov%202022%20poll.PNG

The index could recover in the second half, aided by expectations of peaking rates and reach 434 points by end-2023, down 1.5% from Friday's close and over 12% away from the lifetime high hit in January, according to the poll.

The rise in risk premiums across asset classes will eventually reach a tipping point where a shift to more return-oriented investments will be warranted, said Tomas Hildebrandt, Senior Portfolio Manager at Evli in Helsinki.

Things could change, for example, if the inflation outlook were to start improving significantly or if at least a ceasefire is achieved in Ukraine.

For the coming months, though, investors fear euro zone equities could lag other markets. The region's economy is seen as particularly vulnerable due to an energy crisis exacerbated by the Ukraine war and as the European Central Bank is steadily raising interest rates to fight price pressures in the bloc.

The economic outlook looks challenging as our economists forecast a recession in the euro zone, said Marc Haefliger, Head of Global Equity Strategy at Credit Suisse in Zurich.

We expect earnings to deteriorate and see the region underperforming on our tactical horizon. The economic slowdown will hit the cyclical euro zone market disproportionately, he added.

The STOXX index of the euro zone's top 50 blue chip stocks is seen falling another 7.9% from Friday's close to 3,650 points by mid-2023. It should stay anchored around that level throughout next year before picking up in early 2024.

Money markets are pricing in more than 150 basis points of ECB interest rate hikes by the end of June.

Among country benchmarks, Germany's DAX is seen ending the first half of 2023 at 13,209, down 9.2% from Friday's close. France's CAC 40 and Italy's FTSE MIB are both seen falling over 15% and Spain's IBEX by 17%.

Britain's FTSE 100 is seen at 6,700 points by mid-2023, down 10.5% from last week's close, but by end-2023 it should climb back to 7,373 points.

(Other stories from the Reuters global stock markets poll package:)

(Reporting by Danilo Masoni; additional reporting by Samuel Indyk; polling by Susobhan Sarkar and Sarupya Ganguly, Editing by William Maclean)