NEW YORK SHARES

* Gold up 2.6 pct; Brent oil drops more than $2/bbl

* Concerns center on Greek, Spanish banks (Updates prices, adds details)

By Caroline Valetkevitch

NEW YORK, May 17 (Reuters) - World stocks and oil prices fell o n T hursday on concerns about the health of Spain's banks and the prospect of Greece leaving the euro zone.

Adding to pressure on Wall Street stocks was a U.S. government report showing manufacturing in the mid-Atlantic states unexpectedly contracted in May.

The data helped lift safe-haven U.S. Treasuries prices, and pushed the 10-year note yield to just 5 basis points from its lowest level in at least 50 years, while gold prices rallied 2.6 percent.

Worries about Spanish banks resurfaced after a media report said customers of Bankia had withdrawn more than 1 billion euros from their accounts in the past week. The Spanish government said there had been no such exit of deposits.

Shares of the partly nationalized Bankia fell 13.5 percent but recovered some of the losses after the government's denial.

The developments in Spain followed reports that customers of Greek banks were moving funds on the belief the country would exit the euro, adding to broader anxiety about the region's debt crisis.

"The whole equities market is being driven by a macro trade based upon contagion fear in Europe, and really the problem is undercapitalized banks there," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

Global shares, as measured by MSCI's world equity index , declined 0.6 percent, and were set for a fifth day of losses along with U.S. stocks.

The Dow Jones industrial average was down 81.32 points, or 0.65 percent, at 12,517.23. The Standard & Poor's 500 Index was down 10.85 points, or 0.82 percent, at 1,313.95. The Nasdaq Composite Index was down 42.57 points, or 1.48 percent, at 2,831.47.

The pan-European FTSE 300 index dropped 1.2 percent, a fourth straight day of declines.

Brent crude futures extended losses to more than $2 a barrel on concerns about Greece and the wider euro zone. Brent July crude was down $2.33 at $107.42 a barrel, having fallen to $107.26, the low for the year.

"The oil market, like other risky assets, is within the grips of uncertainty surrounding the euro zone," said Harry Tchilinguirian, BNP Paribas head of commodities strategy.

Investors followed the heated political debate in Athens, where opponents of harsh austerity measures to obtain an international bailout are expected to win new elections in June.

The euro earlier dropped to $1.2665, its lowest level since mid-January, past stop-loss sell orders below $1.2680 and on course for a test of its 2012 low of $1.2623, according to Reuters data. It last traded at $1.2722, up 0.1 percent.

The yen, though, posted sharp gains against the euro and dollar, bolstered by safety bids.

In the U.S. Treasury market, the benchmark 10-year Treasury note was up 16/32, its yield easing to 1.70 percent, - just 5 basis points from its lowest level in at least 50 years.

Gold prices also rose, with spot gold registering its largest one-day gain since late January.

Spot gold bounced to an intraday high of $1,579.70 and was last up 2.36 percent at $1,575.5 per ounce. That is up almost $50 since it plunged to December lows around $1,527 on Wednesday.