European shares fell heavily this morning, extending losses into a third session, with banks lower on escalating worries a Greek default will spark a banking crisis in Europe and Dexia plummeting to an all-time low.
The Stoxx Europe 600 Banking Index fell 4 per cent, and has lost more than 36 per cent in 2011.
Franco-Belgian group Dexia, which plunged 23 per cent, has come under increasing market pressure over its exposure to Greece. A board meeting went on into the early hours of today in an effort to resolve its problems.
Other banks to fall included BNP Paribas and Deutsche Bank, down 6.1 per cent and 6.5 per cent respectively. Greek banks fell 8.3 per cent.
The FTSEurofirst 300 index of top European shares was down 2.5 per cent at 889.48 points earlier, after falling 1.2 per cent yesterday.
"What you are now beginning to see is they (investors) are now picking out the banks. Dexia is the weakest," said Justin Urquhart Stewart, director at Seven Investment Management. "Politicians have to stand behind these banks. Whether you call it state support, nationalisation, you have to keep the financial system working otherwise we will end up with another credit crisis."
Euro zone finance ministers are reviewing the size of the private sector's involvement in a second international bailout package for Greece, a move that could undermine the aid programme and hasten the threat of a Greek default.
Across Europe, Britain's FTSE 100 , France's CAC40 and Germany's Dax fell 2.6-3.1 per cent.
The Euro Stoxx 50 volatility index , the euro zone's main fear gauge, rose 7.4 per cent. The higher the volatility index, based on sell and buy options on the Euro Stoxx 50 index, the lower the risk appetite.
The pan-European index is down more than 20 per cent in 2011. However, Urquhart Stewart felt the drop has been overdone.
"Markets are being driven by irrational political sentiment. Look at the constituents of the markets: good cash flow, good profits, low levels of debt."
Goldman Sachs said average earnings forecasts for European companies will fall 10 per cent in 2012. Goldman's downgrade came after it revised down its global economic growth forecasts to 3.5 per cent for 2012 from a previous estimate of 4.2 per cent.
"The uncertainty around these forecasts is substantial, largely hinging on the progress of credible solutions to the euro zone's funding problems," Goldman strategists say in a note. "We continue to prefer stocks with Bric's exposure and those with high yield and growth."
But Goldman raised its target for Stoxx Europe 600 for the next three, six and 12 months to 220, 240 and 265, respectively. Its previous targets were 210, 225 and 260. The Stoxx Europe 600 closed yesterday at 223.62 points.
Among other individual shares, International Airlines Group fell 4.7 per cent on growing worries its transatlantic partner American Airlines is headed for bankruptcy.
Shares of American Airlines parent AMR Corp closed 33 percent down yesterday on concerns the third-largest US airline could file for Chapter 11 due, in part, to spiralling labour costs.
