Fresh financial gloom weighs on European shares

* FTSEurofirst 300 falls 1.7 pct

* Banks lead decline after fresh credit fears

* Oil down, hitting energy shares

By Amanda Cooper

LONDON, Aug 19 (Reuters) - European shares fell on Tuesday, led by a decline in bank stocks after fresh concern about the future of the two largest U.S. home finance groups rattled equity markets around the world.

By 0746 GMT the FTSEurofirst 300 index .FTEU3 of top European shares was down 1.7 percent at 1,169.13 points, having closed down 0.1 percent on Monday. Declining issues outnumbered advancers by about 13 to one on the index.

A Barron's newspaper report that suggested the U.S. government may have no choice but to effectively nationalise mortgage finance groups Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) and Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) reignited concern in the investment community that the worst of the mortgage crisis was far from over. This along with a stark warning from the former chief economist of the International Monetary Fund on Tuesday that the worst of the global financial crisis is yet to come tilted bank shares in both Europe and Asia into the red.

Banco Santander (SAN.MC: Quote, Profile, Research, Stock Buzz), HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz) and Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) were down 1.6 to 4 percent, ranking them among the worst individual drags on the FTSEurofirst 300.

"Overall the environment for equity markets remains very difficult as it has now become clearer that we are witnessing a more severe economic slowdown," said Tammo Greetfeld, a strategist for UniCredit in Munich.

"The overnight speculation about the need for a bailout of Freddie Mac and Fannie Mae of course is also a burden and this is weighing on the markets this morning."

Asian shares fell to a two-year low .MIAS00000PUS, while on Wall Street, shares in Freddie Mac and Fannie Mae hit their lowest levels in more than 20 years.

A drop in the price of crude oil CLc1 hit Total (TOTF.PA: Quote, Profile, Research, Stock Buzz) and Royal Dutch Shell (RDSa.AS: Quote, Profile, Research, Stock Buzz), which both fell 1.4 percent.

But data from Germany showing producer price inflation hit its highest in 27 years highlighted the fact that even the 23 percent decline in oil registered since mid-July's record highs still leaves crude futures a full 17 percent above where they were this time last year.

"This is a reminder that one should be cautious about how much in terms of future inflation relief one should read into the recent drop in the oil prices," UniCredit's Greetfeld said.

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