* Decline in anxiety a sign of rising confidence

* Large number of VIX May calls likely to expire worthless (Adds closing prices)

By Doris Frankel

CHICAGO, May 19 (Reuters) - A key measure of market volatility on Tuesday dropped to the lowest levels since the collapse of Lehman Brothers in September, suggesting investors are much less worried about sharp swings in equity prices.

The Chicago Board Options Exchange Volatility index .VIX, known as the market's "fear gauge," fell below the key 30 level for the first time in eight months.

The decline in the anxiety that dominated trading through the latter half of 2008 into early 2009 suggested investors no longer see the need to guard as heavily against the potential for unexpected gyrations in shares.

The VIX fell 4.76 percent to 28.80, its lowest close since Sept. 12, 2008.

"We have seen a major correction in volatility following the 39 percent rise in the S&P index from the March lows, and there is rising confidence that we will not test those lows again, as illustrated by the decline in the VIX," said Scott Fullman, director of derivative investment strategy at New York-based broker-dealer WJB Capital Group.

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