European shares were stuck deep in negative territory by midday, with banks leading a sell-off in global equities as investors grew increasingly uneasy about the outlook for the sector.
By 12.06pm, the FTSEurofirst 300 index of top European shares was down 1.7 per cent at 1,158.73 points, having fallen earlier by as much as 2.6 per cent.
Banks fell to their lowest in 5 years, stripping some 20 per cent off the FTSEurofirst as speculation over further capital hikes in the sector heightened on the back of a bearish note from Lehman Brothers and aggravated by comments from Janet Yellen - a top Federal Reserve policy maker.
Lehman Brothers estimated a proposed accounting rule would force US mortgage providers Fannie Mae and Freddie Mac to raise as much as $75 billion between them, causing the stocks to plummet 16.2 and 18 per cent respectively.
European stocks tracked losses in the United States with UBS down 2 per cent, Credit Suisse down 4 per cent and Alliance & Leicester down 8.5 per cent, while Irish banks Allied Irish, Anglo Irish and Bank of Ireland all slumped more than 10 per cent.
The DJ Stoxx European banks sector index has already fallen 37 per cent this year after a 17 per cent fall last year.
The gloom among financials spread to exchange operators. Shares in the London Stock Exchange and Deutsche Boerse topped British and German percentage losers with declines of 9 per cent and 6.4 per cent respectively.
Oil stocks were also under pressure as crude traded well off recent highs above $145. Heavyweights BP, Shell, and Total fell 1.1-2.8 per cent.
In the auto sector, Fiat lost 5.5 per cent as it plans to temporarily shut down most of its plants in Italy in the coming months due to weak demand, according to company information obtained by Reuters.
Concerns over weakening demand also hit rivals Renault, Peugeot and Volkswagen, all down between 3-4 per cent. Supplier Michelin retreated by 7 per cent as SG Securities slashed its price target on the stock by 30 per cent.
Across Europe, Britain's FTSE was down 2.6 per cent, Germany's DAX fell 2.4 per cent and France's CAC lost 2.5 per cent.