PARIS -- European stocks sank more than 4 percent to their lowest close in nearly 2-1/2 years on Monday as the fire sale of troubled Wall Street investment bank Bear Stearns sparked a sharp sell-off among banks.
But the biggest casualty of the session was German engineering group Siemens, which plummeted 17 percent after project delays and cancelled orders prompted it to issue a profit warning.
The FTSEurofirst 300 index of top European shares ended 4.4 percent lower at 1,199.80 points — its biggest one-day percentage drop since a 5.8 percent slump on Jan. 21, driven by worries of a U.S. recession and writeoffs in the financial sector.
The benchmark index has lost about 20 percent since the start of the year, on track to record its worst quarterly performance since the third quarter of 2002.
JPMorgan said on Sunday it would buy Bear Stearns for just $2 a share, fuelling concerns over the valuations in the troubled banking sector and fuelling fears that the global credit crisis is far from over.
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"There is no doubt that the Bear Stearns scenario could happen in Europe," said Marie-Pierre Peillon, head of equity and credit research at Groupama Asset Management in Paris.
Bear Stearns' cash reserves were drained by fleeing customers last Thursday, and on Friday the bank secured emergency funding from the U.S. Federal Reserve, extended through JPMorgan.
"The focus seemed to be on UBS today, but there are also concerns over a number of UK banks such as Royal Bank of Scotland and Barclays because of their high exposure to risky assets," Peillon said.
Swiss bank UBS tumbled 14 percent, while Royal Bank of Scotland shed 8.7 percent and Barclays dropped 9.4 percent.
UBS shares are down nearly 70 percent from their 52-week high, while RBS shares are down 55 percent and Barclays shares are down 48 percent.
Mining and energy stocks also got hammered as commodity prices sharply retreated on growing concerns over the outlook for the U.S. economy. BHP Billiton shed 7.9 percent, Xstrata fell 5.5 percent and Total dropped 3.9 percent.
FED RATE CUT EYED
Emergency measures by the U.S. Federal Reserve announced on Sunday failed to soothe rattled investors.
The Fed cut the discount rate it charges on direct loans to banks to 3.25 percent from 3.50 percent and set up a new program to provide cash to a wider range of big financial firms previously unable to borrow directly from the central bank.
"With the latest developments, the credit crisis now looks worse than what the most pessimistic analysts had predicted last year, and it's not reassuring to see the Fed's latest ... deployment," Groupama's Peillon said.
The Fed holds a rate-setting meeting on Tuesday and futures indicate investors believe the central bank is almost certain to deliver a full percentage-point cut to the federal funds rate.
Investors were also spooked by the implosion of investment company Carlyle Capital Corp, an affiliate of U.S.-based buyout firm Carlyle Group. Carlyle Capital had been severely hit by the global credit crisis.
"The fears that people have about the position of the financial companies are being realised. That obviously breeds more fear and more instability," said Darren Winder, head of macro and strategy research at Cazenove.
"There will be a finale to this, but I think at the moment, people are not confident that that will be any time soon."
Around Europe, Germany's DAX index lost 4.2 percent, UK's FTSE 100 index shed 3.9 percent and France's CAC 40 dropped 3.5 percent.
Among the very few bright spots on Monday, British Energy gained 11 percent after saying it was in talks that could lead to a business combination or an offer, while Greek telecoms group OTE jumped 5.5 percent after Deutsche Telekom said it was buying a 20 percent stake in the company.
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