* FTSEurofirst 300 down 4.1 percent
* Banks hit by toxic debt legal woes
* RBS, Deutsche Bank heaviest sector fallers
* Recession fears, euro zone debt also weigh as bond yields rise
By Brian Gorman
LONDON, Sept 5 (Reuters) - European shares fell on Monday to their lowest close in more than two weeks on renewed worries about recession and euro zone debt, and with banks hit by a U.S. lawsuit connected to the packaging of toxic mortgage debt.
The STOXX Europe 600 Banks index fell 5.9 percent and hit a 29-month low.
It has lost more than a third of its value in 2011, and is
the worst performing European sector. Deutsche Bank
On Monday, a UK press report said Britain's Serious Fraud Office was probing some of its deals in asset-backed securities.
A U.S. regulator sued 17 large banks and financial institutions on Friday over losses on about $200 billion of subprime bonds, adding to the sector's woes.
Other banks to fall included Royal Bank of Scotland , down 12.3 percent.
"We don't know what size the claims are: in the absence of certainty, people sell first and ask questions later," said Ian King, head of international equities at Legal & General, which has $573.2 billion under management.
The FTSEurofirst 300 index of leading European shares fell 4.1 percent to 910.06 points, the lowest close since Aug. 19.
There was one riser, Randgold Resources , in the index. Gold prices rose as investors sought safe havens.
Volume was low, at 87 percent of the index's 90-day average. Wall Street was closed for a public holiday.
Although equity valuations looked low, a combination of factors, including the euro zone debt crisis, meant investors were avoiding risk, King said. "People are pricing in the risk of European meltdown, rather than the likely outcome."
Swiss chemicals maker Clariant AG fell 16.3 percent, in volume 70 percent above its 30-day average, after cutting full-year sales and margins targets for 2011, due to softening global demand and strong Swiss franc.
"This is a microcosm of what's been going on in the economy -- it's symptomatic about demand," King said.
Across Europe, Britain's FTSE 100 ended the day 3.6 percent lower, while Germany's DAX and France's CAC40 fell 5.3 and 4.7 percent respectively.
The economically sensitive auto sector , down 5.8 percent, was among the biggest fallers. German carmakers to fall included BMW , down 6.2 percent.
Further indications of economic weakness helped fuel worries about major economies falling into recession, following bleak US labour market data on Friday
The HSBC Purchasing Managers' Index for China's services sector slowed to a historical low in August.
Growth in the euro zone's dominant service sector eased for the fifth consecutive month in August, expanding at its weakest pace in two years, as expectations for the future plummeted, a survey found on Monday.
BOND YIELDS
Italy's FTSE MIB fell 4.8 percent, on renewed euro zone debt worries.
Yields on Italian and Spanish government bonds hit their highest levels in nearly a month on Monday and are seen rising further as pressure mounts on Italy -- the euro zone's third-largest economy -- to get its fiscal house in order.
"That's giving a great deal of cause for concern," King said. "The ECB has been in there buying bonds in the last couple of weeks, but the rise in yields shows they clearly haven't been able to draw that line in the sand."
There were fresh concerns over European political unity as it looks to contain the region's debt crisis, after German Chancellor Angela Merkel's coalition lost ground in a state election on Sunday.
That goal will be further tested this week, with a court ruling due on Wednesday over German involvement in the region's bailout fund, divisions in the European Central Bank over bond buying and uncertainty over private sector involvement in the second Greek bailout.
ECB President Jean-Claude Trichet on Monday called for the fund to be "immediately" strengthened, and urged more structural reforms to boost the flagging financial sector.[IDnLDE78408O]
The technical picture was also bearish.
"The (FTSEurofirst's) latest price action suggests that the bear phase is unlikely to end soon," said Bill McNamara, technical analyst at Charles Stanley.
"Over recent weeks this index has been meeting resistance when it pushes up to around 978, and the fact it reversed off that high last week means its trading range remains intact."
Valuations looked attractive, for those with risk appetite.
The 12-month forward price-to-earnings ratio on the banks stood at 7.54, with a price-to-book ratio of 0.61, Thomson Reuters data showed, while euro zone lenders were even cheaper, with a P/E of 6.29 and P/B of 0.47.
(Additional reporting by Simon Jessop and Dominic Lau; Editing by David Hulmes)
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