* Fin Min says state banks have 15 days to improve oversight
* Says banks must guard against operations, technology risks
* PNB says scale of fraud it suffered could climb to $2 bln
* Federal police raids law firm tied to PNB case - source (Recasts with finance ministry directive to banks; adds details, background)
MUMBAI, Feb 27 (Reuters) - India's Finance Ministry set a 15-day deadline on Tuesday for state banks to take action to improve their oversight of operational and technological risks after the country's second-biggest state lender was hit by a $2 billion fraud.
The directive did not mention Punjab National Bank , but comes after the lender said on Monday the amount of fraudulent transactions suffered could rise by $204 million, in addition to the $1.77 billion earlier reported. The news sent PNB shares reeling to a 20-month low.
PNB's announcement late on Monday also sent shares of other state-run lenders lower, reinforcing concerns about the escalating financial cost of the unauthorised loans steered towards billionaire jewellers Nirav Modi and his uncle Mehul Choksi, owner of Gitanjali Gems Ltd.
The scale of the fraud, the biggest to hit an Indian lender, has stunned the country and put the lack of supervisory oversight by PNB's own officials, as well as the central bank and auditors under the spotlight.
The fraud has also sparked aggressive investigations by the country's authorities, including a raid last week of Nirav Modi's former law firm that lawyers described as unprecedented.
Rajeev Kumar, the top bureaucrat in the Department of Financial Services, said in a Twitter message that the government expected state-run lenders "to take pre-emptive action and identify gaps/weaknesses" for potential operational and technological risks within 15 days.
Kumar also posted a notice from his department with a list of expected action by the lenders, including identifying current oversight weaknesses, preparing a report on how to improve practices and standards, and directing the banks' boards "to assign clear accountability" for implementation and compliance.
Last week, Finance Minister Arun Jaitley, also without mentioning the PNB case, decried a "lack of ethics" among sections of Indian business and criticised inadequate oversight by auditors and regulators.
Worries about the lack of supervision in India's banking sector have been compounded after state-run Oriental Bank of Commerce said on Sunday it had suffered losses of around $17 million over loans provided to a sugar company that the lender claims was fraudulently diverted.
Meanwhile, pen maker Rotomac Global is facing a police investigation over accusations it cheated a consortium of lenders, while private lender City Union Bank has said this month "cyber criminals" had hacked its systems and transferred nearly $2 million via the SWIFT financial platform.
Analysts said the government directive could hit banks in the short-term if more fraud is detected, though it would benefit the sector in the long-term.
"The oversight in the banking system is obviously not good," said Yuvraj Choudhary, an analyst at brokerage Anand Rathi.
"This could lead to uncovering of more potential scams. We can expect bottom-lines to be hit in the coming quarters."
LAW FIRM RAIDED
Meanwhile, various Indian authorities have stepped up investigations into potential wrongdoing at PNB as well as companies tied to Modi and Choksi, although no charges have yet been filed.
An official at the Central Bureau of Investigation (CBI) said the country's federal police had raided the offices of law firm Cyril Amarchand Mangaldas last week, which had represented Modi for a while, and taken away documents related to the Indian jeweller. He did not give additional details.
Lawyers said they were unclear what legal basis the CBI had used to seize the documents.
Cyril Amarchand did not respond to a request for comment.
At least a dozen people - six from the bank and six more from Modi's and Choksi's companies - have been arrested, while investigators have seized a number of properties from the two, including jewellery and luxury vehicles.
Both Modi and Choksi, whose whereabouts are unknown, have said they are innocent.
PNB shares were trading down 12 percent at 0917 GMT, after earlier falling as much as 14.2 percent to its lowest since June 2016.
A sub-index of state-run lenders, the PSU Bank index , was down 3.5 percent, while top-ranked State Bank of India was down 2.5 percent. (Reporting by Arnab Paul in BENGALURU, Abhirup Roy and Devidutta Tripathy in MUMBAI, and Delhi bureau; Writing by Rafael Nam; Editing by Raju Gopalakrishnan)