European stocks drifted lower yesterday as mounting concerns about the health of the financial sector hit banks, with shares in Royal Bank of Scotland and HBOS plunging about 40 per cent.
The FTSEurofirst 300 index of top European shares ended 0.14 per cent lower at 1,003.51 points after witnessing its worst one-day percentage fall on record on Monday. It is down about 33 per cent so far this year.
Germany's DAX index was down 1.1 per cent, the UK's FTSE 100 index up 0.4 per cent and France's CAC 40 up 0.6 per cent.
Banking stocks were the biggest weighted sectoral losers, with Royal Bank of Scotland and HBOS hit by talk that the British government was mulling a possible bank recapitalisation plan with the country's lenders.
Commerzbank fell 14 per cent, Barclays shed nine per cent and Lloyds TSB slipped 13 per cent.
"Banks need measures to boost their capital, and without real measures from the authorities, it's not a few takeovers or isolated rescues that will help stop the crisis," said Sebastien Barthelemi, analyst at Louis Capital Markets in Paris.
"We need a strong move by governments. Each country has been reacting on its side, but we need something stronger to calm down markets."
Iceland's market authority, battling to stave off national bankruptcy after its banks took on massive debts in expanding overseas, took control of Landsbanki, the island's second-largest bank by value.
Banks have been hammered since the start of the credit crisis in mid-2007, which has prompted financial institutions to unveil massive write-downs of mortgage-related assets, forced Lehman Brothers to file for bankruptcy and triggered a flurry of government bailouts of embattled companies.
The International Monetary Fund increased its estimate of global losses from the financial meltdown to $1.4 trillion and warned that the world's economic downturn was deepening.
The US Federal Reserve moved to unclog the commercial paper market, which is widely used to fund day-to-day business by companies.
European Central Bank Governing Council member Guy Quaden said an interest rate cut was no longer excluded.