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* STOXX 600 down 1.3 percent
* Banks lead sectoral fallers
* Deutsche Bank below 10 euros for first time ever
* Telefonica slips after masts IPO dropped
By Danilo Masoni
LONDON, Sept 30 (Reuters) - European shares fell sharply to eight-week lows on Friday as fresh concerns over the stability of Deutsche Bank spooked investors, weighing particularly on banking stocks.
The pan-European STOXX 600 index was down 1.3 percent by 0815 GMT, having earlier fallen to its lowest point since early August.
Deutsche Bank fell nearly 9 percent to below 10 euros for the first time ever following a Bloomberg report that some hedge funds had withdrawn some excess cash and adjusted positions, a sign that counterparties are wary of doing business with it.
Shares in Germany's biggest bank have wiped out one quarter of their value this month with a $14 billion U.S. demand to settle a mortgage-backed securities case fuelling concerns it may need to tap investors to strengthen its finances.
Worries over Deutsche, which barely passed European stress tests in July and which the IMF said was the biggest potential risk to the wider financial system, hit equities but also sent the euro to a two-month low against the safe-haven Swiss franc.
"The systemic risk of European banks continues to be the most important risk for all markets," Alessandro Balsotti, portfolio manager at JCI Capital in Milan.
While no sector was in positive territory, the STOXX Europe Banks index fell 2.9 percent, the biggest sectoral faller in Europe. The index has been the worst performer so far this year as the industry struggles to make more profit because of ultra low interest rates and sluggish growth.
Shares in Commerzbank, UniCredit and Credit Agricole PA> were all down by more than 4 percent.
Telefonica fell 4.5 percent after the Spanish phone giant cancelled the listing of its mast business Telxius, piling pressure on the group to find other ways to cut its 53 billion euros of debt.
Shares in Hennes & Mauritz fell 2.5 percent after the Swedish fashion retailer posted a quarterly pretax profit fall that was slightly bigger than expected.
Among the few gainers, Osram rose 1.7 percent after German daily Handelsblatt reported that several Chinese companies were interested in buying the lighting company. (Reporting by Danilo Masoni; Editing by Richard Balmforth)