By Sitaraman Shankar

LONDON (Reuters) - European shares fell by midday on Tuesday, wiping out all gains for the month as worries about the future of the top U.S. home finance groups lengthened the shadow that a year-long credit crunch has cast on global equities.

At 1054 GMT, the FTSEurofirst 300 index of top European shares was down 1.5 percent at 1,171.66 points, on track for its seventh month of losses this year.

Financials were the biggest drag on the index, accounting for nearly half of the index's fall, after a Barron's report that suggested the U.S. government may have no choice but to effectively nationalise mortgage finance groups Freddie Mac (FRE.N: Quote, Profile, Research) and Fannie Mae (FNM.N: Quote, Profile, Research).

UBS (UBSN.VX: Quote, Profile, Research) fell 4 percent, Societe Generale (SOGN.PA: Quote, Profile, Research) lost 3.2 percent and Barclays (BARC.L: Quote, Profile, Research) 4.5 percent, while poor results from Danish insurer Trygvesta (TRYG.CO: Quote, Profile, Research) weighed additionally on insurers.

Axa (AXAF.PA: Quote, Profile, Research) fell 3.9 percent while Legal & General (LGEN.L: Quote, Profile, Research) and Prudential (PRU.L: Quote, Profile, Research) both lost 4.4 percent.

Analysts said the economic situation in Europe continued to be grim and more bad news on financials would not help, but a large amount was already discounted with the FTSEurofirst having fallen 22 percent this year.

"A lot is already in the price -- you've got a negative day today and you might have a positive day tomorrow. We expect European equities to end the year pretty much around these levels," said Heinz Gawlak, head of asset management at Generali Investments Deutschland at Cologne in Germany.

"Stock markets anticipate, and there's a certain oversold level out there," he said, but added that the economic picture remained bleak.