Fresh concern about banks' financing hit European shares on Tuesday, although a drop in the oil price and an investor sweep into safe-havens like drugmakers and telecoms helped stem the slide in the broader market.
The banking sector fell to its lowest in five years as fears of more writedowns and the need for additional capital raising to restore balance sheets tattered by the credit crunch dented shares in HSBC, UniCredit and others.
The European equities market got some respite mid-afternoon after Federal Reserve Chairman Ben Bernanke said the central bank may extend its emergency lending facility for big Wall Street firms beyond the end of the year, helping soothe some of the concern about banks' access to funding.
The FTSEurofirst 300 index of top European shares ended the day down 1.47 percent at 1,161.38 points, having fallen earlier by as much as 2.6 percent.
The index has dropped by about 30 percent from last July's 6-1/2 year highs and has lost 15 percent in the last two months alone as confidence in the outlook for equities has crumbled along with the outlook for global economic growth.
Yet some analysts believe there may be some respite to the selling.
"We're probably close to a bottom, but not the bottom. We're so bombed out, so oversold that we could gradually work our way slightly higher. This is not a good moment to sell. We would sell into a bounce, and sell cyclicals," said Philippe Gijsels, a European equities strategist at Fortis Bank in Brussels.
Credit Suisse fell 3.2 percent, while in Britain, Barclays and Royal Bank of Scotland fell 1.1 to 3 percent and Alliance & Leicester shed nearly 14 percent.
Irish banks Allied Irish, Anglo Irish and Bank of Ireland were some of the biggest losers in Europe, falling by 8 to 10 percent.
The DJ Stoxx European banks sector index has already fallen 37 percent this year after a 17 percent fall last year and it is largely because of the banks that the European equities market has taken such a knock.
"Financials will of course be a big factor because there are fears of further writedowns when we see earnings next week and it will keep markets on a back foot," said Cantor Fitzgerald chief global market strategist Stephen Pope.
Crude oil fell by more than $5 a barrel below $140 as the dollar strengthened against a basket of major currencies and concern faded about an Atlantic hurricane.
Although this helped temper some concern about the spread of inflation, the drop put energy stocks under pressure, pushing BP, Royal Dutch Shell and Total down by 2 to 3.4 percent and BG Group and ENI down 2.2 to 4.4 percent, making this sector the worst drag on the broader market.
Investors will keep a close eye on U.S. second-quarter results to gauge whether the crisis among financials continues to spread to other sectors against a backdrop of rising fuel and raw material costs.
Aluminum producer Alcoa kicks off the U.S. second-quarter earnings season after Tuesday's closing bell on Wall Street.
Alcoa often acts as a bellwether for demand for raw materials in the global economy.
With so much concern about the outlook for economic growth and corporate earnings, investors pushed into perceived safe-haven equity sectors such as pharmaceuticals and telecoms.
Pharmaceutical stocks were the biggest positive weight on the FTSEurofirst 300, led by GlaxoSmithKline and Novartis, which rose 2.4 to 3.0 percent.
"They have been a bit of a dark horse and now begin to shine as there is now recognition that as the global population ages and expands, demand for health strengthens," Pope said.
Confident plans from GlaxoSmithKline to double its research and development staff in China in the next few years also helped the sector.
Sanofi-Aventis and Roche rose 0.9 to 2.0 percent.
Among telecoms stocks, Vodafone rose 1.3 percent, while Deutsche Telekom gained 1.4 percent and Telefonica gained 0.6 percent.