* FTSEurofirst 300 index finishes 2.7 percent lower
* Dexia slumps; hits record low on Greek exposure concerns
* Banks, autos, construction shares among top decliners
By Atul Prakash
LONDON, Oct 4 (Reuters) - European shares fell sharply on Tuesday to flirt with a 26-month closing low after European officials discussed making banks take bigger losses on Greek debt and delayed a key aid payment to Athens, with concerns growing that Greece could default.
Investors are worried that a Greek debt default could result in heavy losses for many European banks exposed to the highly-indebted country and spark another round of banking crisis that could further hurt a fragile global economic recovery.
Dexia plunged as much as 38 percent to record lows at one point on concerns about the Franco-Belgian financial group's high exposure to Greece. Its shares ended 22.5 percent lower in heavy volumes, even though France and Belgium promised to support it via guarantees.
The European banking sector , down 4 percent, featured among the top decliners, after the 17 finance ministers, meeting in Luxembourg, called for a review of a July 21 debt swap agreement with private holders of Greek bonds. The banking index has slumped 36.4 percent this year.
"Markets are nervous because there is a lot of political uncertainty. As long as we haven't found a solution for the situation in Greece, the environment would remain challenging," said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($438 billion).
"There is not an easy solution to the problem which has developed over many years. On the one hand, you can argue we need to give the money that is needed to the countries which have higher level of debt. At the same time, you have the problem of governance. You have to walk a fine balance here."
Generali became "underweight" equities in mid-September, Wiener said, advising investors to stick with cash in the present environment that poses challenges to economic growth.
Goldman Sachs also highlighted a tough economic outlook by lowering its growth forecast for advanced economies for 2012 to 1.3 percent from 2.1 percent.
A snap poll of 60 global stock market participants by a London trader showed that 66 percent of respondents were bearish on equities to the year end.
The FTSEurofirst 300 index of top European shares ended 2.7 percent lower at 887.77 points after falling as much as 4 percent to a one-week low earlier in the day. The index hit a 26-month closing low in late September and is down nearly 21 percent so far this year.
"With so many negative factors facing investors at the moment it's impossible to get excited about equities even if they do look arguably over sold," said Angus Campbell, head of sales at Capital Spreads.
"Global growth downgrades, a lack of liquidity and the never-ending European sovereign debt crisis are causing panic to become a thing of the norm within the market place."
TECHNICAL OUTLOOK
The euro zone's blue chip Euro STOXX 50 index fell 2.2 percent to 2,091.09 points. Charts showed it found support at 2,070 -- the bottom of the July-August impulse wave.
Dmytro Bondar, technical analyst at RBS, said momentum tools indicated that the intra-day downtrend was losing momentum and a two-hour MACD (moving average convergence divergence) oscillator suggested a potential bounce to 2,120, a 38.2 percent Fibonacci retracement from the Sept. 23-29 impulse wave.
The index was expected to continue trading within the 2,000-2,200 range this week until a breakout occurs, he added.
European shares briefly pared losses after Federal Reserve Chairman Ben Bernanke said the central bank was prepared to take further steps to help a fragile economic recovery held back by a
But caution soon returned. Several indicators showed that investors remained nervous. The Euro STOXX 50 volatility index , Europe's main fear gauge, rose 3.7 percent to a three-week high, suggesting a lack of appetite for riskier assets.
And the 30-day implied volatility for Britain's FTSE 100 and Spain's IBEX 35 rose to three-week highs on Monday, while that for Germany's DAX , France's CAC 40 , Italy's FTSE MIB and Sweden's OMX S30 climbed to one-week highs, data from Thomson Reuters Datastream showed, indicating investors' wariness.
Among other big fallers, construction and materials shares fell 4.2 percent, with Lafarge down 8.5 percent and HeidelbergCement dropping 9 percent after Mexican peer Cemex hit a 13-year low on concerns about slowing growth in Europe and the United States.
Automobile shares fell 6.2 percent on concerns about global demand for vehicles. (Editing by Hans-Juergen Peters) ============================================================ For rolling updates on what is moving European shares please click on ============================================================ For pan-Europeanmarket data and news, click on codes in brackets: European Equities speed guide................... FTSEurofirst 300 index.............................. STOXX Europe index.................................. Top 10 STOXX sectors........................... Top 10 EUROSTOXX sectors...................... Top 10 Eurofirst 300 sectors................... Top 25 European pct gainers....................... Top 25 European pct losers........................
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