(ADVISORY- Follow European and UK stock markets in real time on the Reuters Live Markets blog on Eikon - see cpurl://apps.cp./cms/?pageId=livemarkets)
* STOXX Europe 600 index down 0.7 pct
* Suffers biggest weekly decline in three months
* Deutsche Bank leads banks lower after U.S. demand for $14 bln
* Orange rises on reports of merger talks resumption
By Danilo Masoni and Atul Prakash
MILAN/LONDON, Sept 16 (Reuters) - European shares ended at six-week lows on Friday, with Deutsche Bank dragging banking stocks lower after it said that the U.S. government is demanding billions of dollars to settle a mortgages case.
Shares in Deutsche Bank fell 8.5 percent as news that the U.S. Department of Justice had asked for $14 billion to settle an investigation into sales of mortgage-backed securities raised worries of a possible capital hike.
The claim far outstrips the bank's and investors' expectations. It is not yet clear what the final payment will be, but if it were as high as $14 billion, it would severely strain the German lender's fragile finances.
"There may be opportunity for Deutsche Bank management to negotiate the fine down, but even around $10 billion it would necessitate a capital raise," Andrew Lim and other analysts at Societe Generale said in a note, confirming their "sell" rating.
Europe's bank index fell 2.1 percent, dragged down by declines of between 2.5 percent and 4.4 percent for shares of Royal Bank of Scotland, Credit Suisse and UBS , which also face litigation over mortgage-backed securities.
Top losers in the STOXX 600 were Portugal's BCP and Italy's Monte dei Paschi di Siena <BMPS,MI>, with both banks down more than 9 percent.
The STOXX Europe 600 index fell 0.7 percent to 337.8 points, its lowest closing level since Aug. 4. After falling 1.4 percent the previous week, the index has dropped 2.2 percent this week for its biggest weekly decline since mid-June.
The Oil and Gas index fell 1.4 percent after crude oil prices slid to multi-week lows as swelling Iranian exports reinforced fears of a global glut.
Telecoms shares outperformed, with French group Orange rising 2 percent on confirmation that CEO Stephane Richard told investors last week that preliminary consolidation talks have resumed between SFR, Iliad and Bouygues. (Editing by David Goodman)