European stocks tumbled around four per cent yesterday, with bank stocks hit particularly hard by acute tension over the risk of recession in leading economies and over eurozone debt.

London’s FTSE 100 index of leading companies dropped 3.58 per cent to 5,102.58 points. In Paris, the CAC 40 fell 4.73 per cent to 2,999.54 points and in Frankfurt the DAX plunged 5.28 per cent to a two-year low at 5,246.18 points.

Elsewhere in Europe, Lisbon gave up 2.82 per cent, Swiss stocks 4.04 per cent, Brussels 4.61 per cent, Madrid 4.69 per cent, and Milan 4.83 per cent.

Bonds issued by Greece and Italy fell, and the cost of insuring against default by Italy and France, as indicated by the market for credit default swap (CDS) instruments, rose sharply.

The euro fell below $1.41 during the trading session, while the price of gold jumped back above $1,900 an ounce on demand for a safe haven investment. The single European currency later recovered to $1.4109 in late afternoon trading against $1.4203 late on Friday.

The dollar rose slightly against the yen, buying 76.86 of the Japanese unit compared to 76.77 on Friday.

The head of the European Central Bank Jean-Claude Trichet yesterday warned of an immediate and imperative need for enactment of a second debt rescue for Greece, and for tightened discipline in the management of eurozone economies.

He also spoke of an eventual “confederal” disciplined management of eurozone national finances.

And the head of the International Monetary Fund Christine Lagarde repeated her warning that banks in Europe need extra capital to withstand any contagion from the eurozone debt crisis.

The move against bank stocks was exacerbated by a decision by US authorities to take legal action against 17 leading international banks over trading in securitised mortgage trading at the heart of the 2008 financial crisis, traders said.