* Index on track for worst monthly performance in 7 years
* Banks and Supermarkets feeling the pinch (Adds analysis, quotes, stocks on the move)
By Pauline Askin and Charlotte Greenfield
SYDNEY/WELLINGTON, Aug 31 (Reuters) - Australian shares fell 1.1 percent on Monday as investors sold stocks on concerns a September rate hike in the U.S. is looking more likely, keeping the ASX on track for its worst monthly performance in seven years.
The S&P/ASX 200 index .AXJO fell 59.5 points to 5,204.1 by 0233 GMT. The benchmark closed 0.39 percent higher on Friday.
The index is set to post its worst monthly performance since October 2008.
Wall Street finished flat on Friday and Asian stocks sagged in early trade after comments by U.S. Federal Reserve Vice Chairman Stanley Fischer left the door open for a September rate hike.
"This is a market that is walking on glass; China seems to be the central theme feeding into a lot of these things but today the focus is very much on U.S. interest rates again," said, James McGlew, executive director of corporate stock broking at Argonaut.
Banks shares struggled, with ANZ ANZ.AX and Commonwealth banks CBA.AX fell 2.07 percent and 1.6 percent respectively.
"The banks have taken a lot of cash out of the market over the last few months; whilst there have been hefty dividends, this would suggest that a lot of those dividends aren't being reinvested this time around," McGlew said.
Grocery retailers fell with Woolworths WOW.AX and Westfarmers, which includes supermaket chain Coles WES.AX in its holdings, were down 4.0 percent and 1.95 percent respectively.
Natural gas infrastructure company Australian Pipeline Ltd APA.AX fell as much as 3.4 percent after being downgraded.
New Zealand's benchmark NZX50 share index .NZ50 edged up 7.55 points or 0.13 percent to 5,673.635, gaining for a third session after hitting an eight-month low the previous week.
The telecommunications and industrials sectors drove gains, led by Air New Zealand AIR.NZ which rose 3.6 percent, boosted by the airline slashing fares on regional flights in response to budget airline Jetstar announcing four new regional routes.
Spark SPK.NZ gained 1.68 percent and hit its highest level in six months, extending gains after strong earnings results. The telecommunications company was an attractive buy due to its share price holding up during a dramatic sell-off in the market earlier this month.
The index is on track to end the month around 4.0 percent lower, while Spark is on track to finish around 12.5 percent higher.
Outdoors outfitter Kathmandu KMD.NZ lost 1.73 percent.