LONDON/NEW YORK (Reuters) - Goldman Sachs Group Inc faced rising regulatory and legal pressure yesterday as allegations that the bank duped clients fuelled momentum for regulatory reform on both sides of the Atlantic.

Shares in the Wall Street powerhouse fell again and the cost of insuring its debt rose as investors struggled to assess how big a hit Goldman and the rest of the financial industry would take from the fraud charges.

The US Securities and Exchange Commission charged Goldman on Friday over its marketing of a sub-prime mortgage product, igniting a battle between Wall Street's most powerful bank and the top securities regulator. Goldman has denied the charges.

"If nothing else, higher regulatory scrutiny could lead to a more cautious work force at Goldman and curtail future revenue generation if it persists," analysts at FBR Research said in a research note. The firm removed Goldman from its "top picks" list.

The civil fraud case cast a shadow over what had been expected to be a blockbuster earnings announcement from Goldman on Tuesday. The 141-year-old bank for the first time said its co-general counsel, Greg Palm, would join its earnings call alongside chief financial officer David Viniar.

In a sign that there might not be an immediate wave of similar cases, CNBC reported that a former lieutenant of hedge fund manager John Paulson had told investors that he did only one deal of the type in the Goldman case. The SEC alleges that Goldman created the synthetic collateralised debt obligation in question at Paulson's behest, and that Paulson made millions by betting against it.

The SEC has said investors were kept in the dark about the fact that Paulson was shorting the CDO. One of those investors, German bank IKB, said it was reviewing all of its financial transactions in the run-up to the crisis. The bank said it might consider taking legal steps but had no grounds for action so far.

The Dusseldorf-based bank nearly collapsed in 2007 and lost almost all of its $150 million in the Goldman mortgage securities product.

Deutsche Bank and UBS led a two percent slide across European bank shares yesterday as investors feared regulators would probe deeper into past deals throughout the industry.

Britain and Germany said they could also pursue Goldman. The UK financial regulator said it was looking at the circumstances of the SEC's charges, as was Germany's BaFin, which said it was considering possible damage claims.

"All this suggests you should not buy into a sector where the regulators are about to move the goal posts," said Bruce Packard, an analyst at Seymour Pierce in London. "Even if they don't, the pitch surface is so uneven that if the goal posts aren't moved, unfortunately we might see a few more broken legs in future."

The prospect of a wider probe unsettled investors across the sector.

In the United States, Democrats tried to use the Goldman allegations to their advantage as they press for congressional approval of the most sweeping package of financial regulatory reforms since the Great Depression.

Senator Christopher Dodd said he was hopeful that agreement would be reached on a bill and claimed that his proposal would have stopped the type of activity alleged in the SEC's suit against Goldman.

President Barack Obama plans to travel to New York later this week to press the case for reform, his spokesman said.

And EU market regulation chief Michel Barnier said that if Goldman was found to have committed fraud, it would reinforce the need for Europe to act to regulate derivatives.

The cost of insuring Goldman's debt with credit default swaps rose to $135,000 a year to insure $10 million in debt for five years.

Robert Khuzami, head of the SEC's enforcement division, referring to deals such as Goldman's, said he was looking "very closely at these products and transactions".

The SEC is investigating if deals arranged by other banks may have misled investors, and among the firms that created mortgage deals that soured were Deutsche Bank and UBS, the Wall Street Journal said.