European shares hit as Italian debt risk surges

* FTSEurofirst 300 ends down 1.8 pct; volatility up 5.2 pct

* Italian debt yields hit 7.5 pct as margin calls upped

* Financials lead fallers; HSBC takes trading hit

By Simon Jessop and Francesco Canepa

LONDON, Nov 9 (Reuters) - European shares fell on Wednesday as rising tensions around Italy's debt situation pushed its bond yields into the danger zone, hitting riskier assets across the board and sending shares in financials sharply lower.

After rallying at the open on news Prime Minister Silvio Berlusconi was set to resign, an increase in margin call on Italian debt by LCH.Clearnet and Italy's top clearing house pushed 10-year paper to 7.5 percent and sent stocks tumbling.

The increase in margin calls took the debt crisis to a new level and risked becoming a "self-fulfilling prophecy", Luca Solca, head of European research at Cheuvreux, said, if more buyers head for the exit.

The move past the 7 percent level, seen by many analysts as unsustainable, prompted aggressive buying of Italian debt by the European Central Bank, which in turn took some of the edge off both equity and bond market runs.

Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management, said the ECB was the "only game in town" able to fight off the pressure on the peripheral debt market, although the large tail risk represented by the crisis meant they remained "underweight" equities.

After focusing on Greece over recent months, debt market speculators are now targeting Italy -- the third-biggest euro zone economy, Europe's largest debtor nation and one considered by many analysts as "too big to bail".

By the close, the FTSEurofirst 300 was down 1.8 percent at 966.22, off its intraday high of 993.44, although benchmark Italian debt remained stubbornly high at 7.2 percent and the country's blue-chip bourse closed down 3.8 percent.

Insurers and banks were among the worst-hit sectors across the region, with the STOXX Europe 600 Banks index down 3.7 percent, weighed by a 6.8 percent fall for leading Italian lender UniCredit .

The firm holds 38.6 billion euros of Italian government debt.

Taking most points off the FTSEurofirst 300, however, was UK-listed lender HSBC , which fell 5.8 percent in volume more than twice its 90-day daily average after the market turmoil caused by the debt crisis marred its trading update.

Europe's largest bank said investment banking profit almost halved in the third quarter, U.S. impairments jumped 64 percent and the outlook for the global economy was "very challenging as problems in developed markets begin to affect growth rates around the world," Chief Executive Stuart Gulliver said.

OUTLOOK

Other corporate earnings provided further evidence of a deteriorating economic environment, with Henkel (HNKG_p.DE), Sainsbury and Ericsson (ERICb.ST) all flagging concerns over the demand outlook whilst posting results.

An earnings recession was priced in, Patrick Moonen, senior Equity Strategist at ING, said, noting European shares are trading at a trailing price-to-earnings ratio of 9.7, or a touch higher than the 7.2 trough level hit in February 2009.

"What's not priced in is the systemic risk that comes out of a badly arranged debt crisis. If we don't find a solution to the crisis, value for equity markets will go down, in some cases by 30 percent," he said.

While stocks fell across the board on Wednesday, volatility, as measured by the Euro STOXX Volatility index , rose 5.2 percent to 41.72, and Moonen said the trend would likely continue into 2012.

"Investors trying to get in and out of the market through the same door" creates a lot of volatility and leaves "no place to hide" as assets become more correlated, Moonen said, citing the move in correlation between emerging and developed market stocks to more than 90 percent. ($1 = 0.736 Euros) ============================================================ 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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