Europe stocks hit 2-week low on jitters

* FTSEurofirst 300 tumbles 2.5 pct in broad selloff

* Banks sink on renewed fears over credit crisis

* Strong U.S. inflation data add to the gloom

By Blaise Robinson

PARIS, Aug 19 (Reuters) - European shares dropped 2.5 percent on Tuesday in a broad equities selloff, ending at their lowest closing level in two weeks on renewed credit fears, a steep jump in core U.S. prices and weak U.S. housing data.

The FTSEurofirst 300 .FTEU3 index of top European shares closed 2.5 percent lower at 1,159.39 points, after falling to as low as 1,159.05, the index's lowest level since August 5.

Banks took a beating as investors worried about the fate of the financial sector following a Barron's report that suggested the U.S. government may have no choice but to nationalise mortgage finance giants Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) and Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz).

Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) sank 5.9 percent, Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz) tumbled 5 percent and Commerzbank (CBKG.DE: Quote, Profile, Research, Stock Buzz) shed 4.9 percent. The DJ Stoxx European bank index fell 4.3 percent.

Data showed on Tuesday that U.S. wholesale prices jumped in July at the fastest year-on-year rate since 1981, while home builders cut back on construction as they worked through a glut of unsold homes.

"Inflation will continue to be a concern, but the real worry is still in the housing market," said Franz Wenzel, strategist at AXA Investment Managers in Paris.

"We will continue to have bleak data for a while. We know from the Japanese example that a housing slump usually lasts for longer than economists can think of."

The U.S. producer price index, which measures prices at the factory door, climbed 1.2 percent after a 1.8 percent gain in June. So-called core producer prices, which exclude food and energy, jumped 0.7 percent in July after a 0.2 percent June increase.

Economists polled by Reuters had expected producer prices to rise just 0.6 percent in July, and had forecast that core prices would be up only 0.2 percent. A sharp decline in oil prices since mid-July led many investors to conclude that inflation pressures were subsiding.

Data from the U.S. housing market added to the gloom. U.S. home building projects started in July fell 11 percent to the lowest annual rate in more than 17 years, while building permits tumbled 17.7 percent.

The DJ Stoxx banking index has lost 33 percent so far in 2008, hit by concerns over the debacle in the U.S. subprime mortgage market that has forced financial institutions to unveil massive asset writedowns and seek emergency capital increases.  Continued...