European shares dropped on Wednesday as fresh concern about the impact of the credit crunch on the banking sector hit financial shares, while a late spike in the oil price rekindled worries about inflation.
The FTSEurofirst 300 index of top European shares closed down 2.4 percent at 1,179.64 points.
Banks were the worst performing sector in Europe, succumbing to pressure after two major Wall Street firms on Tuesday revived concern about the outlook for the entire sector.
Royal Bank of Scotland fell 6.4 percent, making it the top individual drag on the European market, while UBS and France's BNP Paribas and Societe Generale fell between 4.9 and 7.3 percent.
Consumer spending data from the United States that was in line with forecasts and the sudden jump in crude oil futures above $114 a barrel after weekly inventory data did little to reassure investors about the backdrop of slowing economic growth and high inflation.
"We had retail sales that were in line with expectations, so not earth-shattering. But being in line with expectations is not good enough these days, so that was a further threat to equities," said Heino Ruland, a strategist with FrankfurtFinanz.
"The markets were due for a correction because of falling crude and falling commodities but these are not good enough to lift markets because prices are still ... above levels seen last year." The FTSEurofirst had risen for two days in a row this week, but Wednesday's drop put the index on course for a flat performance this week.
With growth in the United States, the euro zone and Britain slowing, the Bank of England's quarterly inflation report that suggested it may even cut rates this year did not offer much in the way of support for the equities market.
The pound fell to near two-year lows against the dollar.
"The BoE report signals that there could be further rate cuts. This is supportive to the sector but of course it also demonstrates that the economic situation is still weak," said Christian Falkner, a trader at Alpha Trading in Frankfurt.
Finland's Sampo lost nearly 7 percent after the group released weaker-than-expected second-quarter earnings, making it the biggest percentage decliner within the sector.
Other insurers on the move included AXA, which lost 5 percent and Germany's Allianz, which lost 3.7 percent.
The DJStoxx index of insurance stocks was down 3.5 percent.
The sell-off in Europe ran deep, with declining issues outnumbering advancers by about six to one on the FTSEurofirst 300.
Utilities were among the few gainers after E.ON's second-quarter results beat forecasts and the company raised its outlook for full-year adjusted net income.
E.ON shares rose 0.3 percent, while France's EDF rose 0.5 percent and GDF Suez rose 1 percent.
Nuclear operator British Energy edged up 0.2 percent after its results were a lot better than some analysts' forecasts even after power station outages cut its first-quarter profit in half.
Mining stocks also gained, recovering from recent sharp losses along with a bounce in base and precious metal prices.
Rio Tinto rose 2.7 percent, Xstrata gained 2.8 percent and BHP Billiton rallied 3 percent.
Other gainers included Continental AG, which rose 2.2 percent after Frankfurter Allgemeine Zeitung said Schaeffler is planning to raise its bid for the automotive supplier.