* FTSEurofirst 300 falls 4 percent on growth worries
* German index loses most
* Automobile, banks among top sector fallers
By Brian Gorman
LONDON, Aug 18 (Reuters) - European equities fell heavily on Thursday, as a bigger-than-expected rise in U.S. weekly jobless claims added to worries about the strength of recovery in the world's biggest economy.
German shares the lost most, with traders citing the effects of a short-selling ban on financial stocks in other parts of Europe.
Germany's blue-chip index was down 5.4 percent on fears that a short-selling ban on financial shares and related financial instruments in France, Italy, Spain and Belgium announced last week had pushed investors towards futures and options on the DAX, excluded from the short-selling ban.
Traders cited investor uncertainty and confusion on whether they can roll their Euro STOXX 50 futures hedge into Friday's expiry, and whether this constitutes a fresh "short" position or not.
"This morning everyone is talking about a 'fat finger' in the DAX futures. However, we don't agree," a trader said.
"We believe this was a new short position. 15,000 contracts traded over a 2 minute span this morning taking the futures down 2.9 percent."
The trader also cited news that Austria was joining Finland in asking Greece for collateral in exchange for emergency loans.
Auto shares , down 6 percent, featured among the worst performers on worries a slowdown in the global economy would dent vehicle demand. Fiat fell 8.9 percent, following disappointing sales news from one of its key markets, Brazil.
At 1354 GMT, the FTSEurofirst 300 index of top European shares was down 4 percent at 932.87 points, and had hit a low of 930.50. The index is down more than 20 percent from a mid-February peak.
The banking sector, exposed to the euro zone debt crisis, was also sharply lower.
The STOXX Europe 600 Banking Index fell 5.9
percent. Heavyweight fallers included Barclays
and Societe Generale , down 9.4 and 8.7
percent respectively. Deutsche Bank
Investors with a negative view on the outlook for the European stock market can't sell futures or put options on indexes that include banking shares covered by the short selling ban such as the Euro STOXX 50 and the CAC , but they can do it on the DAX derivatives.
"(A) DAX hedge is the next best I suppose and it is getting hit today," a German trader says.
New U.S. claims for unemployment benefits rose more than expected last week, according to a government report.
A Morgan Stanley note saying the global economy was dangerously close to recession added to the gloomy outlook for shares.
Citigroup analysts said GDP forecasts were in the process of coming down to levels consistent with sluggish growth, but not a global recession.
Wall Street was lower in early trade. The Dow Jones , S&P 500 and Nasdaq Composite were down between 3 and 4 percent.
(Additional reporting by Joanne Frearson, Blaise Robinson and Harro ten Wolde; Editing by Erica Billingham)
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