* FTSE 100 down 0.7 percent
* Banks fall on fears about health of European banks
* Miners hit by weaker metals, Labor wins power in Austrlia
By Tricia Wright
LONDON, Sept 7 (Reuters) - Britain's top share index fell on Tuesday, weighed down by banks as concerns about the health of European lenders resurfaced, while miners fell as the outcome of the Australian election meant a mining tax was more likely.
By 0802 GMT, the FTSE 100 was down 38.61 points, or 0.7 percent, at 5,400.58, after it closed 0.2 percent higher on Monday, up for a seventh session to reach its highest close since April 30.
Banks were on the back foot after the Wall Street Journal said Europe's recent "stress tests" of major banks understated some lenders' holdings of potentially risky government debt.
Barclays was the worst off, down 2.5 percent. The bank has appointed Bob Diamond, the head of its investment and wealth management business Barclays Capital, as its new group chief executive to replace current head John Varley next year.
"The (WSJ article) is obviously undermining banks and dragging everything down with it," David Morrison, market strategist at GFT Global said.
"Last week was an incredible start to September. There were strong moves up on the back of economic numbers out of the States in particular, but... I think there is a growing feeling that as that data is being dissected, it really did not justify the move up that we saw in equities in the big indices."
Energy stocks and miners were out of favour, pressured by weaker commodity prices.
Developments in Australia also weighed on the mining sector, with two key independent MPs backing Labor, giving Prime Minister Julia Gillard a majority to form a government. With Gillard retaining power, a new 30 percent tax on iron ore and coal mining profits is likely to go ahead.
Rio Tinto was among the biggest fallers in the sector, off 1.6 percent, with Evolution Securities cutting its rating on the stock to "neutral" from "add" as Australian tax uncertainty reappeared.
Among individual movers, Cable & Wireless Worldwide fell 2.5 percent. Singapore Telecommunications, Southeast Asia's largest telecoms firm, is unlikely to bid for Cable & Wireless Worldwide as the company wants to focus on the Asia-Pacific region, Citigroup said in a note on Tuesday.
M&A SPECULATION
Invensys, which is tipped to fall out of the FTSE 100 following this week's reshuffle, added 2.6 percent to top the blue-chip risers' list, with traders pointing to newspaper reports that the company is a takeover target.
Tullow Oil rose 1.8 percent, as the Financial Times and Daily Mail market reports said the oil exploration company was subject to takeover speculation, with China National Offshore Oil Corporation and ExxonMobil named as potential bidders.
In a sign that fears of a double-dip recession are receding, British retail sales growth accelerated last month, helped by clothes sales, a survey showed, but discounting played a part in the improvement and consumers remain reluctant to splash out on expensive items.
Emphasising the tough economic environment the corporate sector is facing, however, British companies expect hiring rates to be static for the rest of this year, with firms in the public sector expecting to cut headcount, a survey by recruitment firm Manpower showed. (Editing by David Cowell)