European stocks tumbled more than 3 percent on Monday as the credit crisis claimed U.S.'s fifth largest investment bank, Bear Stearns,and with Germany's Siemens plungingmore than 16 percent after it issued a profit warning.
Banks were the next big losers, with UBS falling more than 13 percent, while Royal Bank of Scotland and Barclays fell around 8 percent. HBOS slid 12 percent while Alliance & Leicester shed around 7 percent.
"There's turmoil in all markets after Bear Stearns, and equities is not the place to be," said BNP Paribas strategist Edmund Shing. "Everyone's asking: Who's next? Is there a Bear Stearns in Europe, could investment banks start to fail?
"It's clear that Bear was by far the most exposed to mortgage-backed securities relative to their size and were also hit by failure of their internal hedge funds," Shing said, adding there was uncertainty about the extent of European bank losses.
Investors were also on edge ahead of earnings reports later in the week from top U.S. investment banks, expecting the worst.
"Confidence is shattered," Joe Lampel, professor of strategy at Cass Business School, told "European Closing Bell."
JPMorgan Chase agreed to buy its stricken rival for the rock-bottom price of $2 per share, while the Federal Reserve made an emergency quarter-point cut in its discount rate for banks and agreed to finance up to $30 billion of Bear's assets.
Fed Rate Cut Expected
The market is now pricing in a full percentage point cut in federal funds rate at Tuesday's meeting of the Federal Open Market Committee, based on fed funds futures contracts.
The dollar plunged to new depths against the euro and the yen, sparking talk of joint intervention to bolster the greenback. Japan's Finance Minister said he will cooperate with European and U.S. policy makers.
But some analysts were sceptical regarding the possibility of intervention.
"I don't think we will see any coordinated intervention in the currency markets," Marco Annunziata, global head of economics at UniCredit, told "European Closing Bell." A weak dollar is still in the interest of the U.S. and the ECB would not take action on itself, he added.
In money markets, the Bank of England's emergency offer of 5 billion pounds of 3-day loans was nearly five times oversubscribed, as financial institutions scrambled for cash in the face of a global credit crunch.
In corporate news, Royal Dutch Shellincreased reserves forecasts to a 124 percent replacement rate and said it expects top performance in the current quarter.
Industrial gas producer Linde forecast 2008 earnings growth would outpace an expected increase in sales in its second full-year after buying larger UK rival BOC in a leveraged buyout.
UK building materials group Wolseleyreported a 23 percent fall in first-half profit and warned that business conditions in its major markets would become more challenging, according to Reuters.
Also in the UK, nuclear power company British Energy Group said it was in talks with interested parties that could lead to a business combination of an offer of $11.6 billion for the company. Shares of the company were up 11 percent.
-- Reuters contributed to this report