Battered financials hit European shares early

LONDON, July 8 (Reuters) - European shares fell sharply in early trade on Tuesday, tracking a sell-off in global equities on intensified worries that the financial sector would need to raise more capital.

At 0718 GMT, the FTSEurofirst 300 index of top European shares was down 2 percent at 1,155.38 points, taking its losses for the month to nearly 4 percent and for the year to more than 23 percent.

Banks were the top losers, accounting for about a fifth of the index's decline on the day.

UBS (UBSN.VX: Quote, Profile, Research) fell 4.4 percent, Credit Suisse (CSGN.VX: Quote, Profile, Research) lost 4 percent and Alliance & Leicester (ALLL.L: Quote, Profile, Research) slid 7 percent, while Irish banks Allied Irish (ALBK.I: Quote, Profile, Research), Anglo Irish (ANGL.I: Quote, Profile, Research) and Bank of Ireland (BKIR.I: Quote, Profile, Research) fell 5-6 percent.

U.S. stocks fell on Monday after Lehman Brothers estimated that a proposed accounting rule would force mortgage providers Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) to raise as much as $75 billion between them.

"The crisis in the financial system, given banks are the lubricant for the economy, points to continued tight credit," said Jonathan Lawlor, head of European research at Fox-Pitt, Kelton.

"So we have a loop where tight credit leads to slower economic growth, which leads to higher losses for the financial system, which leads to capital constraints for the banks," he said.

He said the readacross from the overnight news on Fannie Mae and Freddie Mac would be more direct for UK markets than the rest of Europe, though Irish banks would be under pressure, as would some Spanish lenders due to their property development leverage.

Amid weakness in the financial sector, exchange operators London Stock Exchange (LSE.L: Quote, Profile, Research) and Deutsche Boerse (DB1Gn.DE: Quote, Profile, Research) topped British and German losers with declines of 6.8 percent and 3.2 percent, respectively.

(Reporting by Sitaraman Shankar)