FTSE falls 1.1 pct as fresh credit fears hit banks

* FTSE 100 falls 1.1 pct * Fears of Fannie Mae, Freddie Mac bailout hit financials * Concerns over global demand weigh on commodities

By Dominic Lau

LONDON, Aug 19 (Reuters) - Britain's FTSE 100 .FTSE fell 1.1 percent early on Tuesday as fears of more credit losses in the banking sector resurfaced after falls in U.S. shares, while worries over weaker global demand weighed on commodity stocks.

By 0721 GMT, the UK benchmark was down 60.5 points at 5,389.7, after ticking down 0.1 percent on Monday.

Wall Street tumbled overnight and shares of Fannie Mae and Freddie Mac fell to their lowest in nearly 20 years after Barron's said the government may have no choice but to nationalise the two housing finance groups. This could wipe out existing holders of the two companies' common stocks and result in losses for other asset holders.

Former IMF chief economist Kenneth Rogoff said the worst of the global financial crisis is yet to come and a large U.S. bank would fail in the next few months as the world's biggest economy hits further troubles.
Banks were the biggest drag on the FTSE 100, with Barclays , Royal Bank of Scotland , HSBC , HBOS , Lloyds TSB and Standard Chartered down 1.1 to 3.5 percent.

"The widening in U.S. Libor ... is very significant because it suggests that banks are under pressure to finance debt that they have to repay by the end of the year," said Jeremy Batstone-Carr, head of private client research at Charles Stanley. "Certainly, judging by the data that I have seen, the numbers are enormous which is going to leave the banks very constrained. The credit crisis is going to keep on claiming victims throughout the remainder of the year."

The spread of London interbank offered rates over overnight index swap rates widened on Monday. The spread expresses the premium paid for borrowing over anticipated central bank rates, and a wider spread is seen as an indication of decreased inclination to lend.

Batstone-Carr said central banks should give up their fight against inflation and focus on shoring up growth and tackling the crisis in the financial sector.

Energy stocks fell as crude prices CLc1 dipped below $112 a barrel. BP , Royal Dutch Shell , Cairn Energy and Tullow Oil lost between 0.6 and 1 percent.

Gas producer BG Group was one of seven gainers on the index, rising 0.3 percent as Australia's Origin Energy reiterated that its shareholders should reject the British firm's $11.9 billion hostile takeover bid.

Metal prices also eased on concern that the global economy was slowing, though the U.S. dollar hit a seven-month high against a basket of major currencies.

BHP Billiton (BLT.L: Quote, Profile, Research, Stock Buzz), Rio Tinto , Anglo American , Antofagasta , Vedanta Resources and Eurasian Natural Resources shed 0.9 to 2.5 percent.

Xstrata slipped 1.2 percent. The Swiss-based miner said it was suspending operations at its Falcondo ferronickel mining operation in the Dominican Republic as a result of market conditions.

Weaker commodity prices, on the other hand, helped eased inflationary worries.

But Bank of England monetary policy committee member Tim Besley said the central bank faced a difficult task in fine-tuning monetary policy to try to help the UK economy whilst also keeping inflation in check.

Vodafone shed 0.9 percent after the Financial Times said the mobile phone giant is to increase its minimum British call charges from September by at least 25 percent and by as much as 50 percent for some customers.

Clothing retailer Next rose 1.5 percent after Goldman Sachs upgraded the stock to "buy" from "neutral" and added to its "conviction buy list". (Editing by Quentin Bryar)