European shares snapped a nine-day winning streak yesterday, hit by plans for a new, tougher stress test for euro zone banks, as well as by a crop of weak earnings numbers and forecast downgrades in other sectors.

The STOXX Europe 600 Banks index dropped 2.1 per cent on its weakest day in two months after the European Central Bank said it would review the quality of a broader-than-expected range of assets held by top regional lenders next year, which may result in them having to raise fresh capital.

Veronika Pechlaner, head of global equities at Ashburton, said the surprise was that government bonds would be quite closely looked at in the stress tests.

“We don’t know the levels and from the general tone of the statement so far it doesn’t seem like a very harsh approach,” she said. “The periphery and the banks had a huge rally earlier in the month so to see a bit of money taken off towards month end is not too unusual.”

The retreat takes the banking sector down from Tuesday’s 2-year highs after its value rose by more than a quarter since late June. Spanish and Italian banks were the worst hit, due to their large holdings of domestic sovereign bonds and generally weaker balance sheets than some north European peers.

“In terms of the actual capital requirements... you might only need 10 percent but those banks who can claim 12 and 13 per cent will be rewarded,” said Neil Wilkinson, European equities fund manager, Royal London Asset Management.

“They will also be judged on how quickly they can get there. Investors will attach more importance to this, and that’s why I will feel more comfortable in the higher quality names.”

The Spanish IBEX and Italian FTSE MIB both had their worst sessions in since August.

Down 1.8 and 2.4 per cent, respectively, the two have some of the highest exposure to banks among the major European indexes.

Financials were the biggest drag on the pan-European FTSEurofirst 300, which fell 0.6 per cent to close at 1,279.99 points, retreating from a five-year high.

The top stock fallers on the index, however, were all earnings related. Brewer Heineken fell 4.5 per cent after it reduced full-year profit guidance due to a drop in sales in certain regions.

STMicroelectronics, meanwhile, lost 8.9 per cent after the chipmaker reported weak quarterly results and pushed back a profit margin target by six months.