UPDATE 3-French markets fall, investors see no 'silver bullet' for political crisis

Adds comment, refreshes prices

PM Lecornu resigns

French risk premium spikes to January high

French banking shares, bonds under pressure

Credit default swaps jump

By Amanda Cooper and Samuel Indyk

LONDON, Oct 6 (Reuters) - French stocks and the euro fell while France's borrowing costs jumped on Monday, as the within hours of being appointed, fuelling uncertainty over the euro zone's second-largest economy.

Prime Minister Sebastien Lecornu unexpectedly handed in his resignation to President Emmanuel Macron hours after announcing his cabinet line-up - making it the shortest-lived government in modern French history.

Paris' $3 trillion CAC 40 index dropped more than 1.3%, making it the worst-performing index in Europe.

ONLY HOURS INTO THE JOB

Shares in major lenders tumbled, leaving BNP Paribas , Societe Generale and Credit Agricole down between 3% and 4%.

The euro , which has weathered much of France's political turmoil in the last year, slid 0.2% on the day to $1.172.

"There seems to be no willingness in parliament for a budget to be passed, so I think yields higher, pressure on euro-dollar in the near term," said Danske Bank analyst Kirstine Kundby-Nielsen.

French mid-cap stocks were hit hard , tumbling 2.6% and set for their largest one-day drop since April, while other European markets did not go unscathed either. The broader STOXX 600 dipped 0.3%, Germany's DAX was a touch weaker.

France has the largest budget deficit in the euro zone, which is almost double the European Union's preferred limit of 3%.

Its problems take the shine off this year's European stocks rally, which has been driven by increased spending on security and infrastructure from the likes of Germany.

France's long-term finances were already vulnerable, and politics has become increasingly unstable since Macron's re-election in 2022, given the lack of any party, or grouping holding a parliamentary majority.

Successive prime ministers - France has now had three in under a year - have tried and failed to push through unpopular budgets and on Monday, Lecornu's cost him his job.

"Lecornu’s resignation confirms that French bonds remain uninvestable. As long as there’s no majority in parliament, no one will be able to tackle France’s debt and fiscal problems," Mathieu Savary, BCA Research chief strategist of developed markets ex-U.S., said.

"The problem is that dealing with this issue will most likely demand a full-blown crisis in the (bond) market to discipline French politicians," he said.

BORROWING COSTS SOAR

French bond prices dropped, pushing yields on benchmark 10-year debt up as much as 9 basis points to nearly 3.6%, before retreating to 3.563%. That left the premium investors demand to hold French debt, rather than triple-A rated German paper , at 85 bps, near its highest since January.

This spread hit a 2012 high of 90 bps last November.

Investors are worried about France's creditworthiness, compounded by a last month. On Monday, credit default swaps - a derivative that reflects the cost of insuring against a sovereign default - rose to 41 bps, the most since April, up from 38 bps on Friday.

"The bigger question is how does this all resolve itself?" said Pepperstone senior research strategist Michael Brown.

"Because there doesn’t seem to be an obvious solution or obvious silver bullet that we can look to, to resolve it overnight."

French politics drags Europe lower https://reut.rs/3KBkv6f [https://reut.rs/3KBkv6f]

France-German bond spread widens as French government collapses https://reut.rs/46BsXee [https://reut.rs/46BsXee]

Concern levels converge https://reut.rs/47cR3w4 [https://reut.rs/47cR3w4]

(Additional reporting by Samuel Indyk, Lucy Raitano and Shashwat Chauhan; Graphics by Dhara Ranasinghe and Marc Jones; Editing by Andrew Cawthorne, Dhara Ranasinghe Hugh Lawson and Sharon Singleton)