Debt contagion fears drag Europe shares to 4-mth lows

* FTSEurofirst 300 index down 1.7 pct

* Banks, insurers fall on debt contagion fears

* Italian banks pare losses after debt auction

By Harpreet Bhal

LONDON, July 12 (Reuters) - European shares fell sharply to four-month lows on Tuesday, as jitters intensified that the deepening euro zone debt crisis could spread to larger economies such as Italy and Spain, putting at risk the region's financial stability.

By 1046 GMT, the pan-European FTSEurofirst 300 index of top shares was down 1.7 percent at 1,079.20 points, having earlier dropped to a low of 1,068.92 -- its lowest intraday level since mid March when the market hit a low for the year.

Investors worried that the debt crisis that has so far forced bailouts for Greece, Ireland and Portugal could spread to larger economies such as Italy, which has one of the largest public debts in the world.

Risk aversion prevailed as policymakers struggled to prevent the debt crisis from spreading. Euro zone finance ministers promised longer debt maturities and a more flexible rescue fund to help Greece and other EU debtors, but they set no deadline to act.

"The euro zone is in real difficulty and with Italy and Spain coming under pressure, it becomes evident that the current strategy to buy governments time to reform by countries lending money to each other has its limits," said Tammo Greetfeld, equity strategist at UniCredit Group.

Banks were among the most vulnerable to the sell-off as investors worried about the sector's exposure to peripheral euro zone debt. The STOXX Europe 600 shed 1.7 percent to leave it down nearly 14 percent so far this year.

Italian banks Intesa Sanpaolo and Unicredit , however, reversed earlier falls to trade 2.3 and 2.6 percent higher after Italy sold its targeted 6.75 billion euros of 12-month bills, although yields soared.

Italy's FTSE MIB also pared losses to trade 0.3 percent lower. Intesa Sanpaolo and Unicredit have fallen 15 and 19 percent respectively since the beginning of the month.

"It is very difficult to see what policymakers can do (to shift market sentiment) besides governments trying to push through reforms in their own countries, but all this needs time to be able to show positive results," Greetfeld said.

Across Europe, Britain's FTSE 100 , Germany's DAX and Spain's IBEX fell 1.5 to 2.1 percent.

Technical problems at NYSE Euronext forced the stock market operator to suspend the dissemination of levels for its key European stock indexes, affecting France's CAC-40 , Amsterdam's AEX , Belgium's BEL 20 and Portugal's PSI 20 .

INSURERS FALL

European insurance stocks fell 2.1 percent to a seven-month low, with the sector taking a hit from mounting concerns over the euro zone debt crisis as insurers typically hold large volumes of government debt.

Ageas was down 3.6 percent in heavy trade which represented around 254 percent of its average 90-day trading volume. ING , Allianz and Axa fell between 2.7 and 3.4 percent.

Strategists said the weight of recent macroeconomic events could lead to a volatile summer trading period, with euro zone debt concerns, disappointing labour market data from the United States last week and expectations of further policy tightening in China adding to uncertainty over the outlook for equities in the medium-term.

"We are currently being hit by a tsunami of bad news from three time zones -- the disappointing economic figures out of the U.S., the slowdown in China and the troubles in the euro zone. Enough elements are on the table to continue the nervous and volatile summer," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels. (Additional reporting by Atul Prakash; Editing by David Holmes)

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