By Jonathan Gould

FRANKFURT (Reuters) - Deutsche Bank <DBKGn.DE> shares hit a record low on Tuesday and state-backed lender NordLB scrapped plans for a 500 million euro ($560 million) bond sale, underlining investor concern about the health of the financial industry in Europe's largest economy.

The decision by NordLB to shelve the bond issue because of a lack of demand came a day after Deutsche, Germany's largest bank with around 100,000 employees, was forced to reassure investors it did not need government support to help meet a potential $14 billion claim from the U.S authorities.

Andreas Dombret, board member responsible for banking supervision at Germany's central bank, said politicians must let Europe's banks sort out their own problems and allow the sector to shrink to an economically sustainable size.

"Political support for the banking sector must finally come to an end -- something that unfortunately I've only seen to a limited extent," Dombret told an audience in Vienna, comparing banks to dinosaurs facing a threat of extinction.

Squeezed by the European Central Bank's low interest rates, German banks have been seeking ways to boost revenue by passing on costs to corporate customers and increasing fees for retail depositors, but profit margins remain thin in one of Europe's most competitive banking markets.

Banks such as Deutsche are also counting the cost of litigation dating back to their expansion before the financial crisis in 2007-2009. Deutsche has said it will fight the $14 billion demand from the U.S. Department of Justice.

Deutsche shares hit a record low of 10.19 euros as investors fretted over the impact of the U.S. claim but later managed to pare losses and close flat.

Traders said the stock recovered after remarks by a senior u.s. Justice Department official on the possibility of lowering mortgage-related penalties for banks if they cooperated with authorities.

"It seems clear to me that the market assumes now about an $8 billion fine," said one investor in a multi-billion-dollar fund, who declined to be named.

"They would have to sell something or do an equity raise to become investable again," the person said.

German Chancellor Angela Merkel on Tuesday declined direct comment on the bank's situation, saying that she hoped its temporary problems could be properly resolved.


Commerzbank shares also fell on Tuesday on reports Germany's second biggest lender would cut around 9,000 jobs over the next few years and would scrap its 2016 dividend to help offset the cost.

The revamp is expected to cost around 1 billion euros ($1.1 billion), a person close to the lender's supervisory board told Reuters.

Chief Executive Martin Zielke is due to present the plan to Commerzbank's supervisory board this week and expects to unveil it publicly on Friday.

Commerzbank's shares closed 2.2 percent lower, hit by the prospect of no dividend instead of the 20 cents per share expected for 2016, traders said. The German government owns a stake of more than 15 percent in the bank.

Deutsche shares have fallen by more than half since the start of the year, while Commerzbank is down almost 40 percent.

Cost cutting is a priority as banks seek to become leaner while mastering the transition to simpler, more digital business models, with the sector as a whole expected to shed many thousands of jobs over the coming years.

"Too many banks are still offering too many products to their clients," said one banking regulator, when asked about prospects for the German banking sector.

Deutsche, Commerzbank and NordLB are among German banks struggling to recoup tens of billions of dollars of loans as a global shipping industry slump hits them hard.

(Additional reporting by Simon Jessop in London, Arno Schuetze in Frankfurt and Francois Murphy in Vienna; Editing by Keith Weir)