European shares fell to their lowest close since October 2005 yesterday, with banks the heaviest-weighted losers after a bearish note from Goldman Sachs reignited fears of further losses in the sector.

The FTSEurofirst 300 closed down 2.5 per cent at 1,197.02 points, suffering its worst one-day percentage fall since mid-March.

Goldman Sachs downgraded US brokerages to neutral and added Citigroup to its "conviction sell" list, forecasting more writedowns.

"We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of a rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales," Goldman said, estimating that Citigroup would take an additional $8.9 billion in net writedowns in the second quarter.

Dutch-Belgian bancassurer Fortis was the biggest percentage loser in Europe, ending 19 per cent lower after saying it would shore up its balance sheet with measures worth over €8 billion, including scrapping its interim dividend and issuing new shares.

A statement by Chinese shareholder Ping An Insurance that it is planning to buy five per cent of the shares to maintain its holding failed to support the stock.

Banks in general tracked US losses with Barclays shedding 5.7 per cent, Credit Suisse down four per cent and Deutsche Bank down 3.3 per cent.

"There is a tremendous amount of uncertainty around in the entire financial services sector because we don't really understand what they are actually holding and what they are not holding," Octavio Marenzi, head of financial services consultancy Celent said from Paris, referring to Goldman's comments on Citigroup.

"I am not sure how they have come to their conclusions but when you see what happened to Bear Stearns - 48 hours before the collapse things seemed okay - so when people are valuing the sector now they prefer to err on the side of caution," Mr Marenzi added.