* Stocks fall amid deleveraging

* PNC to buy National City for $5.2 billion

* Financial system reduces leverage

By Jonathan Stempel

NEW YORK, Oct 24 (Reuters) - U.S. bank shares tumbled Friday amid expectations that government efforts to stabilize the financial system won't keep economies worldwide out of a deep recession and that losses from bad loans will soar.

The sector was also rocked by the latest merger to save an ailing lender: PNC Financial Services Group Inc (PNC.N: Quote, Profile, Research) agreed to buy Cleveland's National City Corp NCC.N for $5.2 billion in stock. The transaction values National City at $2.23 per share, 19 percent below where it closed on Thursday.

"This is part and parcel of the eventual cleanout" of leverage in the financial system, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago. "We are aware of hedge funds that are being forced to sell, and banks are forcing customers to bring margins up. Mutual funds are getting large redemptions, and exchange traders are under extreme pressure."

In early trading, the Standard & Poor's Financials Index fell as much as 6.7 percent and neared its 12-year low, with carnage affecting the biggest names in U.S. finance, such as JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), Citigroup Inc (C.N: Quote, Profile, Research), Bank of America Corp (BAC.N: Quote, Profile, Research) and Goldman Sachs Group Inc (GS.N: Quote, Profile, Research).

Banks worldwide are trying to reduce balance sheet risk after taking on too many mortgages and complex debt, which no longer have buyers.