US STOCKS-Wall St falls on euro zone debt fears; banks drag

* Bank shares off on fears on mortgage-related lawsuits

* European shares hit 2-year closing low on debt worries

* Indexes off: S&P, Dow both 1.8 pct, Nasdaq 1.6 pct

* For up-to-the-minute market news see [STXNEWS/US] (Updates to late afternoon)

By Edward Krudy

NEW YORK, Sept 6 (Reuters) - Wall Street stocks tumbled for a third session on Tuesday on rising concerns about the euro zone's debt crisis and the outlook for the global economy.

Major U.S. banks were among the biggest decliners, with the KBW Bank index <.BKX> off nearly 2 percent on fears that lenders face a growing list of mortgage-related lawsuits.

Late on Friday, the Federal Housing Finance Agency sued 17 large U.S. banks over subprime mortgage-backed bonds.

Nervous investors channeled cash into less risky assets as doubts resurfaced over the political will of Italy and Greece to push through tough budget and debt measures demanded by other euro zone members, while Germany hardened its stand against giving them more aid.

Declines on Wall Street followed a 4 percent slide in European equities on Monday on renewed worries about the euro zone's debt crisis, when U.S. markets were closed for the Labor Day holiday. For details, see [ID:nL5E7K61RE]

"We have got a shot at trading the S&P under 1,100 again," said Nick Kalivas, an equity index analyst at MF Global in Chicago. "I don't sense that people are really going to defend the market until something like that occurs."

The S&P 500 hit a 2011 low of 1,101 on Aug. 9.

The Dow Jones industrial average <.DJI> dropped 198.71 points, or 1.77 percent, to 11,041.55. The Standard & Poor's 500 Index <.SPX> fell 20.91 points, or 1.78 percent, to 1,153.06. The Nasdaq Composite Index <.IXIC> lost 39.43 points, or 1.59 percent, to 2,440.90.

Traders are monitoring lows set by major global indexes during the selloff in the first half of August. So far, only Germany's DAX, down nearly 25 percent this year, and Japan's Nikkei have fallen below those levels.

European shares <.FTEU3> extended losses on Tuesday, falling to their lowest close in more than two years on worries the euro zone debt crisis was deteriorating, while the PHLX Europe sector index <.XEX> slumped 4.2 percent. U.S.-listed shares of Credit Suisse fell 13.4 percent to $23.72.

The Financial Times reported several big U.S. banks, in talks with state officials on settling claims of improper mortgage practices, were offered a deal to limit legal liability in return for a multibillion-dollar payment. [ID:nL3E7K60BC]

Several brokerages including Nomura cut their price targets on big lenders.

Bank of America Corp lost 3.6 percent to $7.00 and JPMorgan Chase & Co fell 3.8 percent to $33.33.

Among gainers, Sunoco Inc rose 5 percent to $37.91 after the energy company said it plans to exit its refining business and focus on its logistics operations.

Packaging company Temple-Inland Inc jumped 25 percent to $30.80 after International Paper Co agreed to buy it for $32 per share. International Paper rose 6.4 percent to $27.19.

European and U.S. stocks briefly pared losses after data showed the pace of expansion in the U.S. services sector unexpectedly accelerated in August. That followed data on Friday that showed zero net employment growth, stoking recession concerns. [ID:nN1E7850B2]

Trading volume was lower than usual at 4.6 billion shares on the New York Stock Exchange, the American Stock Exchange and Nasdaq.

Decliners beat advancers by more than five-to-one on the New York Stock Exchange. On Nasdaq, decliners were beating advancers by about three-to-one. (Reporting by Edward Krudy; Editing by Leslie Adler)