European insurers ran into heavy selling in the immediate aftermath of the reports from the US on concerns that the sector could face claims running into billions of dollars.
Traders pointed to a sell-off in reinsurers amid fears of massive claims against disaster insurance policies.
"This is not a markdown, people are actually selling the insurers," said one trader.
"It is safe to assume claims will be in billions," said Mr Robert Hartwig, chief economist for the Insurance Information Institute, who witnessed the New York incidents.
He said the losses would be covered if the crashes were intentional attacks, since acts of terrorism were covered by insurance policies in the US.
The insurance sector was the biggest loser in the FTSE Eurotop indexes, falling 12.6 per cent in late afternoon trade.
German insurer Allianz and the world's biggest re-insurer, Munich Re, were among the hardest hit stocks.
Allianz dropped 10.6 per cent to €235.96 and Munich lost 14 per cent to €234.99, although one analyst doubted that the group's earnings would be significantly affected.
Shares in Swiss Re, the world's second largest re-insurer, fell 17.3 per cent to €126.50 as the company said it was too early to say what the group's exposure would be. Italy's Generali was also hard hit, falling 7.8 per cent to €29.60.
Heavy losses were also recorded in other financials, with Deutsche Bank down 13 per cent at €56.40. France's Credit Lyonnais lost 7.5 per cent to €38.10 and SociΘtΘ GΘnΘrale gave up 8.7 per cent to €56.10. Switzerland's UBS lost 8.9 per cent to SFr68 and CS Group dropped 11.6 per cent to SFr55.
Airline stocks, perceived as being in the front line of any wider terrorist abuse, fell precipitously. Lufthansa lost 19 per cent at €12.47 less than half its January peaks and Air France was down 16.3 per cent at €13.40. KLM fell 22.5 per cent at €10 and Swissair 8.8 per cent at SFr72.
Oil stocks chased surging crude prices to turn in the only positive sector performance on what amounted to one of the most volatile days of trading in recent memory.
Brent Blend, the North Sea benchmark for crude, jumped to $31 a barrel shortly after the tragic news concerning the World Trade Center in New York. In late trading in London, the October future remained above $30, its highest level for more than 12 months.
