* FTSEurofirst 300 off 1 pct, set for 7th week of falls
* Contagion fears persist, reflected in Spain debt auction
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By Harro ten Wolde
FRANKFURT, June 16 (Reuters) - European shares fell on Thursday and are heading for their seventh consecutive weekly drop as worries about Greek's debt troubles worsened and investors feared contagion, reflected in Spain's debt auction.
Banking stocks and risk-sensitive mining shares were among the biggest decliners, with the STOXX Europe 600 banking index down 0.7 percent and the basic resources index down 1.4 percent on lower copper prices.
By 1200 GMT, the pan-European FTSEurofirst 300 index of top shares was down 1 percent at 872.08 points. The index is on track to fall for a seventh straight week, its longest losing streak since January 2008.
Investors worried policymakers will be unable to agree on plans to rescue Greece, and about the possible contagion effect a Greek default would have on other highly indebted euro zone countries such as Portugal and Ireland.
"The political stalemate between some European governments and the ECB is proving not easy to resolve although only a few days are left to avoid a disorderly credit event for Greek government debt," said Tim Brunne, a Munich-based credit strategist for UniCredit.
"Investors should be prepared for a Greek default within the next few weeks."
Political uncertainty worsened in Athens after a string of parliamentary resignations threw Greek Prime Minister George Papandreou's plan to reshuffle his cabinet and seek support for a crucial austerity package into disarray.
"An orderly debt restructuring, which we have been saying was inevitable for months now, suddenly seems like a more benign outcome," said Marcus Svedberg, chief economist at Swedish asset manager East Capital, which has 5.9 billion euros ($8.34 billion) under management.
"The market is, as usual, worried about contagion."
Those fears were reflected in investors fleeing into safe-haven core debt. That supported a French bond sale but did little to help a 2.8 billion euro auction of 10- and 15-year Spanish paper .
The cost of insuring Greek debt against default set fresh record highs.
"The current stalemate reminds us more of the bankruptcy of (General Motors) GM about two years ago than the filing for bankruptcy of Lehman Brothers in September 2008," said UniCredit's Brunne.
"In the case of GM, the U.S. government strongly opposed a filing for bankruptcy for many months but then, suddenly, implemented a 'prepackaged bankruptcy' to restructure the carmaker in an orderly manner."
The Euro STOXX 50 volatility index rose more than 10 percent to a three-month high. The higher the volatility index, based on sell- and buy-options on Euro STOXX 50 stocks, the lower investors' appetite for risk.
Around Europe, UK's FTSE 100 index was down 1.25 percent, Germany's DAX index down 0.8 percent, France's CAC 40 down 1.1 percent and Spain's IBEX down 1.1 percent.
Markus Huber, trader at ETX Capital, said markets were likely not to recover as long as uncertainty surrounding Greece would persist.
"It would be essential that not only a compromise regarding Greece will be found, but also that it will be communicated to the public in way that it leaves no room for speculation and misinterpretation." ($1=.7072 Euro) =============================================================
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