LONDON, Dec 2 (Reuters) - Investors punished French

stocks and sold the euro on Monday, as the government in Paris

faced a no-confidence motion over its proposed budget in the

coming days that risks bringing it down.

Prime Minister Michel Barnier's government appears close to

collapse after the far-right National Rally (RN) said on Sunday

it would likely back a no-confidence motion in a dispute over

the budget.

Blue-chip stocks on the CAC 40 were down 0.4% by

1043 GMT, having recovered from an early rout that pushed the

index down by as much as 1.2%. Shares in banks and insurers

fell, while the extra premium that investors demand to hold

French debt rather than benchmark German bonds rose.

The euro was the worst-performing major currency

against the dollar on Monday, falling by as much as 0.76% to a

session low of $1.0496, having lost 2.8% in November, its

largest monthly slide since May 2023.

RN lawmaker Marine Le Pen on Sunday issued Barnier with an

ultimatum to make further concessions over his unpopular budget

or risk the no-confidence motion.

"Our team had thought that Le Pen may not want to bring down

the government and be blamed for a French financial and economic

crisis. Yet it looks like the pressure may stay on the euro with

a potential no-confidence vote coming on Wednesday," ING

strategist Chris Turner said.

Echoing such concerns, strategists at Monex Europe said:

"Heightened political uncertainty under such an eventuality

would inevitably weigh on the euro. Indeed, euro/dollar has

already slipped 0.7% through early trading. We would be

surprised if more downside is not in store too if the political

dysfunction in France continues."

The euro hit 14-month highs above $1.12 in late September,

but has since lost over 6% in value, partly due to Donald

Trump's win in the U.S. presidential election in November, but

also to concerns about the prospect of a swifter fall in euro

zone interest rates than those in the United States.

French borrowing costs also rose on Monday above those of

Greece for the first time on record, according to

LSEG data. Greece is traditionally one of the euro zone's

weakest economies and the move in French borrowing costs is a

stark sign of the political and economic stress facing France.

The gap between France and Germany's 10-year bond yields - a

measure of French borrowing costs compared to the euro zone

benchmark - was up nearly 4 basis points (bps) to 83.8 bps. The

spread jumped to 90 bps, its highest since the euro zone crisis

of 2012, last week when tensions over the budget shot higher.

Standard & Poor's on Friday held its rating on France's

long-term sovereign debt steady, in a fleeting moment of relief

for Barnier's government. However it said it could cut the

rating if the government is unable to reduce its large budget

deficits.