UK banks tumble as gilt yields hit highest sine 1998, budget jitters mount

LONDON, Oct 1 (Reuters) - UK bank stocks fell sharply on Thursday, as British 30-year borrowing costs hit their highest since 1998, as jitters mounted about Britain's finances and vulnerability to high oil prices and inflation ahead of this month's budget.

Banking stocks were down across the board in Europe as a sell-off in government bonds drove yields to fresh multi-year highs, something that can erode lenders' profitability.

Shares in Natwest NWG.L were down 5.4%, those in heavyweight HSBC HSBA.L fell 4.4%, Barclays BARC.L dropped 4% and LloydsLLOY.L lost 4.4%

The FTSE 350 banks index .FTNMX301010 fell 4.5%, set for its largest one-day drop since May 5, while an index of euro zone banking shares .SX7E was only down around 3%.

The falls in UK bank stocks gathered pace after Sky News reported the heads of Britain's major lenders, including those for Barclays, HSBC and Lloyds, had been summoned to a meeting next week with finance minister John Healey ahead of this month's budget, as expectations build for possible taxes on banks in the Autumn Budget on October 28.