Updates with analyst comment, closing levels

By Sruthi Shankar and Pranav Kashyap

Oct 17 (Reuters) - European shares fell on Friday, as signs of credit stress at U.S. regional lenders unnerved investors and drove them into safe-haven assets.

The continent-wide STOXX 600 index .STOXX closed nearly 1% lower, but still logged a modest weekly gain of 0.4%.

European banks .SX7P were down 2.5%, with Deutsche Bank DBKGn.DE, Barclays BARC.L, Italy's Unicredit CRDI.MI and France's BNP Paribas BNPP.PA all losing between 3.3% and 6.5%.

U.S. regional bank stocks fell after two lenders disclosed loan fraud, driving concerns around credit quality after two recent U.S. auto bankruptcies had put investors on edge about the sector's exposure.

The selloff comes more than two years after Silicon Valley Bank's failure, when high rates drove paper losses on its bonds.

The flight to safety pushed gold XAU= to a record high of $4,378.69 per ounce.

"If the latest credit jitters have a more profound impact on broader credit and equity valuations, and financial conditions tighten, then the Federal Reserve will respond and the trajectory towards 3.5% next year could be in place," said Kenneth Broux, senior strategist at Societe Generale.

FRENCH STOCKS LOG BEST WEEK SINCE APRIL

Luxury stocks .STXLUXP helped cushion the broader market as Ray-Ban maker EssilorLuxottica ESLX.PA jumped 13%, adding nearly $20 billion in market value as investor enthusiasm for its AI-powered Ray-Ban Meta META.O glasses gathered momentum.

Luxury was also the best performing sector this week, powered by LVMH LVMH.PA, which beat forecasts and reported its first quarterly sales rise this year.

Continental AG CONG.DE was up 11.3% after the German auto supplier's preliminary third-quarter sales came in at 5 billion euros - just ahead of its own consensus forecast.

An absence of U.S. economic data due to a prolonged government shutdown, simmering trade tensions between the U.S. and China, as well as concerns about stretched valuations in the technology sector have kept markets in check this week.

French stocks .FCHI posted their best weekly performance in nearly six months, though, after Prime Minister Sebastien Lecornu survived twin no-confidence votes having shelved controversial pension reforms - a move that could eventually help pass a tough budget.

"France could learn a thing or two about fiscal policy from those countries that needed bailouts during the euro-zone crisis," said Adrian Prettejohn, Europe economist at Capital Economics.

The STOXX aerospace & defence index .SXPARO dropped 3.6% after U.S. President Donald Trump and Russian President Vladimir Putin agreed to another summit on the war in Ukraine.

Novo Nordisk NOVOb.CO fell 6.4% after Trump said the price of the Danish drugmaker's best-selling weight-loss drug would be lowered and that negotiations over price changes would be swift.

Spain's BBVA BBVA.MC gained 6% after the lender failed to convince Sabadell SABE.MC shareholders to back its 16.32 billion euro ($19.10 billion) hostile takeover bid. BBVA said it would immediately resume shareholder remuneration. Sabadell's shares were down 6.8%.

($1 = 0.8546 euros)

(Reporting by Sruthi Shankar in Bengaluru; Editing by Janane Venkatraman, Kirsten Donovan)

((sruthi.shankar@thomsonreuters.com;))