* Potential $10 bln US fine for BNP unsettles rivals
* "Unknown political risk" a worry - bank bosses
* Adds to worries over euro zone, Russia, trading slump
* US, Europe bank shares up about a fifth in past year
LONDON, June 6 (Reuters) - A prized collection of French paintings and furniture at a London museum provided a fitting backdrop this week for a dinner attended by 40 big bank bosses, where the conversation buzz was the huge fine potentially facing France's biggest bank.
BNP Paribas may have to pay a fine of about $10 billion for allegedly evading U.S. sanctions, sources say, a penalty that executives from banks in Europe and the United States fear marks a step-change in the scale of punishments on offenders in the financial services industry.
"It's a worry for any industry when there's an unknown political risk that is impossible to quantify for," said one of the bankers attending the dinner at The Wallace Collection, a museum renowned for its displays of 18th century French paintings, furniture, porcelain as well as European suits of armor.
"No-one knows the seriousness of what's happened, but the numbers (reported for the potential BNP fine) have gone from 1 billion to 5 billion to 10 billion, and people want to know what's driving that."
BNP Paribas' problems cast a shadow over the entire meeting this week of Institute of International Finance (IIF), a finance industry body, which was attended by around 1,000 bankers, regulators, hedge funds and other industry executives.
Bankers were taking stock at the meeting of progress made in repairing damage to reputations and balance sheets from the 2008 financial crisis.
Share prices point to some recovery in investor confidence in the industry. U.S. and European bank shares are up about 20 percent on average over the past year and 58 percent in the last two as the industry has stabilized since the crisis.
But investigations into alleged manipulation of foreign exchange markets, a slump in trading revenues and job cuts plus political tension in Russia have undermined optimism that banks are well on the way to recovery.
And a cut in European Central Bank interest rates halfway through the IIF event was a reminder of the weak euro zone economy that has driven up banks' bad debts. As a result, more of the region's banks could need to bolster capital as part of a health check this year.
But it was the implications of BNP Paribas' massive potential penalty and possible criminal convictions of other banks that dominated chatter at conference drinks parties.
"Ten billion for BNP is ridiculous," Erste Bank chief executive Andreas Treichl told Reuters.
Other banks, including the British co-hosts HSBC, Barclays and Standard Chartered, have also fallen foul of U.S. regulators in the past three years.
Analysts at Credit Suisse this week forecast Europe's banks could end up paying $104 billion in litigation costs, nearly double their previous estimate of $58 billion. The $104 billion estimate includes $66 billion of losses to come.
These costs could hit banks' dividends and returns and may also reduce the cash available to lend to businesses to get Europe's economy moving.
French officials have said the scale of BNP Paribas' possible penalty could hurt the euro zone's recovery and trade talks with the United States. U.S. President Barack Obama has dismissed any prospect he might intervene.
"Those fines are over-excessive, I think they are much too high and they are not healthy at all," Jeroen Dijsselbloem, the head of the group of euro zone finance ministers, said. He said it was creating a lot of nervousness.
Baudouin Prot, chairman of BNP Paribas, did not join his counterparts from HSBC, UBS, Barclays, JPMorgan and others at the Wallace Collection dinner on Wednesday night, held for the IIF's board of directors.
Prot also withdrew from speaking at the conference.
BNP Paribas' head of group public and regulatory affairs Jean-Jacques Santini declined to comment on any aspect of the affair.
The bank has set aside $1.1 billion to cover a potential fine and said last month it could be far higher. It has declined to comment on U.S. authorities potentially seeking nine times its provision for an alleged breach of sanctions mainly involving Sudan, Iran and other countries between 2002 and 2009, sources have said.
"WALKING WILLINGLY INTO COURTS OF JUSTICE"
The conference's main dinner was held in London's neo-gothic Royal Courts of Justice, which allowed BBC political editor Nick Robinson, who was the main speaker, to point to the irony of this choice of venue.
"Never before have so many bankers and so many financiers walked willingly into the courts of justice," Robinson said.
But despite the coats of arms of numerous Lord High Chancellors bearing down on them, the assembled financiers seemed at ease.
Some finance industry executives were confident that the industry had made substantial progress in cutting risk and improving standards in the six years since the financial crisis.
"We have gone very far to put 'too big to fail' in the rear view mirror and make the financial system, more safe, more sound, more secure, more transparent and more accountable," Rob Nichols, Washington D.C.-based head of policy organization Financial Services Forum.
But with senior bankers warning it is likely to take at least two more years for banks to clear paying for past sins, they acknowledged there may not be much relief when the IIF meeting moves to Qatar next year.
(Additional reporting by Clare Hutchison and Marc Jones. Editing by Jane Merriman)