European Stocks Hit 3-Year Closing Low

European stocks dropped 1.9 percent on Tuesday, knocked lower by growing fears over the fate of the financial services sector, but a steep fall in oil prices helped the market end above the session's lows.

U.S. crude oil futures sank more than $7 to just over $137 a barrel after the U.S. Federal Reserve Chairman Ben Bernanke said that a weakening housing market, tighter credit and rising oil prices threatened the economy.

The FTSEurofirst 300 index of top European shares unofficially ended 1.9 percent lower at 1,112.59 points, after falling by more than 3 percent.

It is the index's lowest close since May 2005.

"We're back into the panic mode we experienced back in mid-March. The distrust is at a very high level, and it is totally justified," said Marie-Pierre Peillon, head of equity and credit research at Groupama Asset Management, in Paris.

"The U.S. housing crisis is getting worse, and it has now spread from the "subprime" segment to the "prime" segment, with regional banks getting hit now," Peillon added.

Banks got hammered again, with Fortis the biggest loser.

The stock sank 11 percent on worries the Belgian-Dutch financial services group might have to raise more funds and after the Dutch market regulator said it was looking into the company's funding plan.

Fortis said it did not envisage any additional capital increase.

Royal Bank of Scotland shed 7.1 percent, Natixis dropped 9.7 percent and Anglo Irish Bank fell 6.9 percent.