Europe's early gains were erased as the markets feared for the future of the region's banks and the possibility that much of the sector may have to be nationalized or receive further government help to stave off collapse.
Germany's DAX was down 39.06 points, or 0.9 percent, at 4,327.22, while France's CAC-40 fell 19.63 points, or 0.7 percent, at 2,997.12.
Most attention was on the FTSE 100 index of leading British shares, which was down 35.13 points, or 0.9 percent, at 4,111.93, after the British government said it would be creating a progam to insure bank loans in the hope that the banks will start lending again.
The relatively modest drops in three stock markets masked big declines in the share prices of some of the continent's biggest banks. In Germany, Deutsche Bank AG sank 10 percent while Commerzbank AG was 8 percent lower.
The biggest concerns focused on Britain, where Royal Bank of Scotland Group PLC plunged 60 percent after it said it would likely post a 2008 loss of 28 billion pounds ($41.3 billion), which would be the biggest loss ever reported by a British company. Shares traded at only 20 pence (29 U.S. cents) a share.
Meanwhile, newly-merged Lloyds Banking Group PLC dropped 35 percent. And Barclays PLC, which had earlier recouped most of its 25 percent decline on Friday, was back under pressure, with its shares 8 percent lower.
``Sentiment and confidence is absolutely shot to pieces in the banks and the markets are voting with their feet,'' said Howard Wheeldon, senior strategist at BGC Partners in London.
The banking sector's latest stock market woes came after the British government unveiled a new plan that would require banks to identify their riskiest assets and allow them to pay a fee to insure them with the government in return for lending more money. By offering to insure bank loans, the government is exposing taxpayers to billions of pounds of potential losses.
In addition, the government gave the Bank of England the green light to, in effect, start printing money by buying whatever bank assets it considers to be necessary.
As part of the package of measures, the government said it will be increasing its stake in cash-strapped Royal Bank of Scotland to 70 percent from 58 percent by converting preference shares into ordinary shares.
The problems potentially facing Europe's banks were stoked last week by Citigroup Inc.'s announcement that it will split its operations in two, separating its traditional banking business from the company's riskier assets, as it posted a massive $8.3 billion fourth quarter loss. Bank of America Corp. also revealed a $2.4 billion quarterly loss and had to tap the U.S. government for a cash injection of $20 billion in exchange for stock.
Stock markets around the world had started 2009 on a relatively strong footing, glad to have put the previous year behind them and hopeful that the incoming Obama administration would be able to limit the length and depth of the recession in the U.S. with its massive stimulus plan.
Those hopes of a turnaround in the world economy by the middle of this year have evaporated as investors grappled with increasingly grim economic and corporate data from across the world.
``Renewed concerns surrounding the state of the U.S. banking sector and the global recession have brought the rally in global equities to an abrupt end,'' said Andrew Pankiw, analyst at Henderson Global Investors.
Earlier, most Asian stock markets following a rally on Friday on Wall Street.
Japan's Nikkei 225 stock average edged up 26.70 points, or 0.3 percent, to 8,256.85, South Korea's Kospi gained 1.4 percent to 1,150.65 and Hong Kong's Hang Seng recovered early losses to rise 0.6 percent to 13,339.99.
Shanghai's benchmark rose 1.7 percent and markets in Australia and Singapore also gained. Thailand and Malaysia retreated.
Wall Street will be closed Monday for the Martin Luther King Day national holiday, and the focus will be on Barack Obama's inauguration as President when trading resumes Tuesday.
On Friday, the Dow Jones industrials rose 68.73 points, or 0.8 percent, to 8,312 and the S&P500 gained 9.9 points, or 1.2 percent, to 858.50.
Oil prices continued to languish with light sweet crude for February delivery down $1.34 at $35.17 a barrel in electronic trading on the New York Mercantile exchange.
The dollar was down 0.2 percent to 90.54 yen while the euro fell 0.7 percent to $1.3194.
http://accesswdun.com/article/2009/1/216962