* Short sellers target NatWest, ING and others

* Data shows rising number of funds think banks' rally overdone

* European banks index at 9-year high

LONDON, May 13 (Reuters) - Investors are racing back into European bank stocks after a surprisingly upbeat earnings season, pushing their shares to multi-year highs, but the bounce has also lured short sellers betting that the optimism is unlikely to last.

The STOXX European banks index climbed past 200 on Friday, its highest level since August 2015, as confidence in the sector's earning power grows while the U.S. Federal Reserve and Bank of England hold back on widely-anticipated interest rate cuts.

But the number of investors making short bets against some major banks is also rising, suggesting they are not convinced that the rebound will last.

The number of funds betting on a share price fall at British bank NatWest Group has almost doubled between Jan. 2 and May 3 from 16 to 31, according to data from Hazeltree, which provides software and other services to investment funds.

Deutsche Bank is among other European banks which have also caught the eye of speculators, Hazeltree said, while 21 investors are shorting Amsterdam-listed ING, up from seven funds at the start of the year.

While the percentage of shares shorted is not tracked, Hazeltree's data is indicative of investor positioning since around 700 asset manager funds contribute to it on an aggregated and anonymised basis, Hazeltree said.

Short sellers are investors who make money from falls in the value of a stock. They borrow shares, sell them and re-buy the stock after the price has fallen, pocketing the difference.

The rise in both short and long investor interest in the European banks reflects increasingly divergent views about the region's economy and the ability of consumers and companies to cope with higher-for-longer borrowing costs, some analysts said.

Others analysts, including Benjie Creelan Sandford, equity analyst at Algebris Investments, said the banking sector's outperformance of the broader European market - by around 10% year to date - had sharpened focus around technical market indicators.

Creelan Sandford said higher measures of momentum reflected in the RSI (relative strength index) may have led some participants to tactically increase short positions.

The RSI can help investors to determine whether a particular security might be overbought or oversold.

"From here individual stock selection will have an increasingly important role to play," he said.

The short selling bets by funds on European banks could also be seen as a protective strategy against potential economic headwinds in the region, said Bruno Schneller, managing partner at Erlen Capital Management in Zurich.

Elevated levels of lending to hedge funds in the U.S. show some are putting cash to work where they see opportunities, Schneller said, after a tendency for many to sit on the sidelines in recent years.

Italian bank Intesa showed the third highest increase in short bets behind HSBC and NatWest, with the number of funds betting short rising from 19 to 26 and a net increase in the value of such bets outstanding, according to Hazeltree.


European bank chiefs confirmed they have seen a spike in investor interest this year, following a raft of better than expected earnings.

That included NatWest, which attracted the most short-selling interest by value according to the Hazeltree data, as the bank prepares for its escape from state ownership.

While that should be a long-term boon for the bank, the rise in short bets could reflect concerns a mooted retail share sale by the government may not attract much demand.

British banks also face bigger-picture worries about slowing consumer credit demand and mortgage defaults which are set to rise in 2024 as higher costs hit borrowers' ability to repay, according to consulting firm EY.

The region's investment banks, which have played second fiddle to Wall Street rivals, also did well in the first quarter with Deutsche Bank reporting much better than expected profit and Barclays showing progress in its strategy.

European banks' strong quarter also contrasted with a number of the big U.S. banks where costs rose ahead of revenue growth, said Nigel Moden, Banking and Capital Markets Leader for the EMEIA region at EY.

Investors have taken note, Moden said, and European banks' shares rose by an average 2% on results day relative to the European banks index.

One senior banking executive described a rapid rebound in sentiment towards UK bank stocks in the last six months, with rising dividend payouts and modest valuations attracting long-only investors from the United States, Canada and Japan.

"They are flying in to meet us now, whereas six months ago, we were doing all the running," the London-based executive told Reuters.

(Editing by Jane Merriman)