UK banks tumble as gilt yields hit highest since 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.

Shares in Natwest were down 5.2%, those in heavyweight HSBC fell 4.3%, Barclays dropped nearly 4% and Lloyds lost 4.4%

The FTSE 350 banks index fell 4.1%, set for its largest one-day drop since May 5, while an index of euro zone banking shares 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.

The Treasury declined to comment when contacted by Reuters.

(Reporting by Amanda Cooper, Sophie Kiderlin and David Milliken; Editing by Dhara Ranasinghe and Alun John)