UPDATE 1-UBS, HBOS lead Euro banks down on credit fears

(Rewrites with sector, updates shares, adds quotes)

ZURICH, March 3 (Reuters) - European bank shares weakened broadly on Monday as fears of a deepening credit crisis mounted after HSBC (HSBA.L: Quote, Profile, Research) racked up writedowns and analysts pondered worst-case scenarios for Switzerland's UBS (UBSN.VX: Quote, Profile, Research).

HSBC confounded a downbeat sector with a 10 percent profit rise, sending its shares up 1 percent, but fanned the flames of doubt for the lending industry overall after it tacked on a $6.7 billion increase in bad-loan charges in 2007 versus 2006.

The Dow Jones index of European banks was down 1.8 percent overall, with UK mortgage lender HBOS (HBOS.L: Quote, Profile, Research) falling 5.72 percent on concerns about possible writedowns from toxic asset-backed securities it held on its books.

Analysts at investment bank Bear Stearns downgraded their investor rating to "peer perform" for HBOS.

"The capital base (is) overshadowed by more ABS exposure than previously thought," Bear said, pointing to 7 billion pounds in exposure to so-called Alt-A mortgage instruments, or home loans graded just one level better than subprime.

UBS also shed over 5 percent, taking its losses to 60 percent since highs seen less than one year ago as analysts reckoned that signs of a weakening credit market meant UBS would have to write down more investments after writedowns of roughly $18 billion in 2007.

"It looks as if even bigger mistakes have been made than what they previously said. It's hitting everybody who has been active internationally," said one Zurich trader.

"Further writedowns appear likely and could be large," said analysts at bank Credit Suisse, estimating another 15.5 billion Swiss francs ($14.85 billion) in potential writedowns at UBS and lowering their target price for UBS to 57 francs from 67 francs.