European shares head for worst week in three months, Deutsche Bank slumps

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* STOXX Europe 600 index down 0.3 pct

* Index on track for worst week in three months

* Deutsche Bank leads banks lower

By Atul Prakash

LONDON, Sept 16 (Reuters) - European shares slipped on Friday and headed for their worst weekly performance in three months, with Deutsche Bank dragging financial services down after it said the U.S. government was seeking billions of dollars to settle a mortgages case.

Shares in Deutsche Bank fell 7.3 percent, the biggest decline in the pan-Europen STOXX 600 index, after Germany’s flagship bank said the U.S. Department of Justice was asking it to pay $14 billion to settle an investigation of its sales of mortgage-backed securities .

The claim far outstrips the bank’s and investors’ expectations for such costs. It is not yet clear what the final payment will be, but if it were as high as $14 billion, it would severely strain Deutsche’s fragile finances and probably further rock investor confidence.

“The surprise for the market is not because they have to pay, but due to the huge amount. It’s an overhang, but these litigation costs are getting less important,” said Ronny Claeys, senior strategist at KBC Asset Management in Brussels.

“These are hopefully a thing of the past. Deutsche Bank is one of the few banks which still have to pay, but it doesn’t change the view on the sector as a whole.”

Other financial stocks also came under pressure. The European banking index fell 1.4 percent, dragged down by 2.2 to 4.1 percent declines for shares of Royal Bank of Scotland , Credit Suisse and UBS.

The STOXX Europe 600 index fell 0.3 percent by 0821 GMT. After falling 1.4 percent in the previous week, the index is down 1.8 percent so far this week and headed for its biggest weekly loss since the middle of June.

The European energy sector also lost ground after oil prices fell on worries that U.S. rig counts would continue to rise and that a resumption of Libyan and Nigerian exports would stoke a global supply glut.

The European Oil and Gas index fell nearly 1 percent. Shares in both Royal Dutch Shell and BP were down around 0.7 percent. (Editing by Larry King)