European shares end lower on Greek worries

General view of the trading floor of Frankfurt's stock exchange August 24, 2011.

LONDON (Reuters) - European shares fell on Monday, reversing last week's gains, on concern Greece might not receive its next aid tranche as policymakers struggled to find an answer to the region's debt crisis.

Greek Prime Minister George Papandreou canceled a trip to the United States while international lenders urged the country to make cuts to its public sector and improve tax collection to avoid a sovereign debt default.

Investors awaited word on a teleconference held after the European market close between Greece, the European Union and International Monetary Fund inspectors for clues on how Athens might implement the austerity measures needed to secure further aid.

"There is a concern Greece could see an imminent default and the market is taking fright," said Richard Batty, strategist at Standard Life Investments, which has $245 billion of assets under management.

Adding to downbeat sentiment was the failure by finance ministers at the weekend to come up with an exit strategy for the debt crisis and the likelihood of political disarray in Germany following a regional electoral defeat for the ruling coalition.

"Investors are wanting policymakers to give them a way out, but at the moment they are not offering that. That is a key worry," Batty said.

The STOXX Europe 600 Banks index .SX7P fell 3.4 percent, undermined by worries of a future funding squeeze were Greece to default.

French banks Societe Generale (SOGN.PA) and BNP Paribas (BNPP.PA), which both have exposure to euro zone sovereign peripheral debt, fell 6.7 percent and 5.5 percent to feature in the bottom performers list on the CAC .FCHI.

A recent Reuters poll has said it was likely Greece would default within a year.

Concerns have been growing that the debt crisis could spread to Italy and Spain, where bond yields have risen.

A study based on credit default swap prices showed if Italy or Spain defaulted it would triple the likelihood of France failing to meet repayments to almost 50 percent.

Lloyds Banking Group (LLOY.L) was another standout loser, down 6.7 percent, hit partly by concerns about the euro zone debt crisis as well as by the resignation of its finance director.

The bank index has fallen 30 percent since late July on euro zone debt contagion fears as well as worries slowing growth could spark recession in major economies.

The pan-European FTSEurofirst 300 .FTEU3 index of top shares closed down 2.3 percent at 916.07 points, erasing last week's gain.

POLITICAL STRUGGLES

The lack of any outcome from the weekend's Ecofin meeting also dented hopes of a coordinated expansion of the European Financial Stability Facility (EFSF) seen as vital to help stem contagion risks.

Last Friday, U.S. Treasury Secretary Timothy Geithner, who also attended the meeting, urged policymakers to increase the rescue fund which many traders see as necessary to help support the equity markets.

"We have been been underweight financial equities all year and this is unlikely to change unless the rescue fund is made bigger and there is some fiscal unity that would help mitigate potential bank losses," Batty said.

"I don't think we are anyway near this."