* FTSEurofirst 300 drops 1.5 pct
* Italian stocks pressured by debt contagion fears
* French banks fall on Italian exposure
LONDON, July 11 (Reuters) - European shares fell to a two-week closing low on Monday, with affected stocks heavily sold off on escalating worries that the threat of contagion from the Greek debt crisis could lead to more countries requiring financial aid.
The pan-European FTSEurofirst 300 index of top shares closed 1.5 percent lower at 1,097.60 points, its lowest closing level since June 28.
Italian shares fell 4 percent on strong volume to hit its lowest level in more than a year on fears the euro area's third-largest economy, which has one of the largest public debts in the world, could be next to succumb to the region's debt crisis.
"Considering the size of the Italian economy the impact (of debt contagion) will be much bigger than Greece. If the right measures are not introduced, this might impact the creditworthiness of the whole euro zone," said Anita Paluch, sales trader at ETX Capital.
Shares in the country's largest lender Intesa SanPaolo fell 7.7 percent, despite new disclosure requirements from Italian market regulator Consob on short positions unveiled on Sunday.
"Apparently big macro hedge funds shorted Italian banks in order to defend and enhance their long (German) Bund vs short BTP (Italian government bonds) trade performance. There is serious money in that trade," Mediobanca analysts wrote in a note.
The premium investors demand to hold Italian paper rather than lower-risk German debt rose to a new euro lifetime high, pushing up financing costs for Italy and its banks.
The STOXX Europe 600 banking index fell 2.9 percent. French banks, which have a large exposure to Italian debt, were among the top fallers with Societe Generale , BNP Paribas and Credit Agricole off 5.7 to 7.7 percent.
The bank share losses dragged France's CAC-40 down 2.7 percent to post its biggest intra-day loss since June 2010 on strong volumes.
"Friday was a purge on the Italian banks. Today is a purge on those who are most exposed to Italy, that's to say the French (banks)," said a Paris-based analyst.
In an attempt to calm fears of contagion from Greece's debt troubles, a meeting later of the Eurogroup of 17 euro zone finance ministers is expected to discuss the possibility of buying back Greek debt or the private sector swapping holdings for longer-dated maturities, a source told Reuters.
GLOOMY ECONOMY
Reflecting the caution in the market, the Euro STOXX 50 volatility index , one of Europe's main gauges of investor anxiety, rose 17.2 percent to a two-week high.
The higher the volatility index, based on sell and buy options on the Euro STOXX 50 index, the lower the market's risk appetite.
Traders said the mood of investors was also soured by worries about the pace of economic recovery, following disappointing labour market data from the United States on Friday.
Adding to worries about the global economy, data over the weekend showed inflation in China rose to a three-year high in June, raising concerns for further interest rate increases there.
Among individual fallers, BSkyB L> fell 4.6 percent as the British government looked for a way out of approving a multi-billion dollar deal by Rupert Murdoch to buy the broadcaster amid the phone-hacking scandal surrounding the News International unit of his News Corp group.
On the upside, Northumbrian Water rose 5 percent after it said a group owned by Li Ka-shing, Hong Kong's richest man, has made a takeover approach that values the British water utility at about 2.4 billion pounds ($3.9 billion) (Additional reporting by Christian Plumb and Matthieu Protard; Editing by Greg Mahlich)
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