Europe's banks in freefall as fear stalks the markets once again

Fear gripped Europe's banks yesterday as shares in French and Italian lenders dived on concerns they would be crippled by the eurozone crisis.

Société Générale led French banks down as market rumours about its financial position sent its shares tumbling more than 20 per cent during the trading session. SocGen, France's second-biggest bank, was forced to issue a statement denying speculation that it was in trouble.

Shares in Unicredit and Intesa, two of Italy's biggest banks, were suspended because of volatile trading. Fears about Italy's sovereign debt burden sent the banks down 9.4 per cent and 13.7 per cent respectively.

French banks were hit by rumours that France was about to follow the US and lose its top AAA credit rating. SocGen shares closed down almost 15 per cent and have nearly halved in the last four weeks. BNP Paribas, France's biggest bank, fell 9.5 per cent.

SocGen also suffered after a typographical error in a Reuters chart sparked concerns that the bank, a big bullion trader, was trying to raise cash by selling gold futures cheaper for 12 months than for one month.

Later, rumours swept the market that an unlisted French insurer was in financial difficulty and had sold its big holding of SocGen shares.

SocGen last week revealed a slump in second-quarter profit as the bank was hit by its big exposure to Greece. The bank also admitted it was unlikely to meet its 2012 profit forecast.

A SocGen spokesman said there had been no change since the profit warning, adding: "SocGen categorically denies all the market rumours."

The eurozone crisis is in danger of spreading from peripheral countries such as Greece and Portugal to major economies such as Italy, Spain or even France. Fears about which banks might be hit by holdings of bonds issued by troubled countries have caused inter-bank lending costs to rocket. Simon Maughan, an analyst at MF Global, said: "Basically, the banks have stopped lending to each other again because of stories that one or another of them has gone under and that has created a liquidity problem."

The situation is reminiscent of market turmoil following the bankruptcy of Lehman Brothers in September 2008, when plunging share prices and soaring costs of funding and debt sent the sector into meltdown.

Last week the European Central Bank started to buy Italian and Spanish government bonds to stem the crisis but markets doubt its willingness or ability to do enough to stop the rot.

Mr Maughan said central banks' attempts to ease fears were in fact "red flags" to the market. "All they have done is say, 'We are extremely concerned about the situation', and that has given an excuse for people to start selling."

British banks were also casualties of the sell-off. Barclays dropped 8.7 per cent, followed by Standard Chartered and Royal Bank of Scotland, which both shed more than 7 per cent. Santander, Spain's biggest bank, fell 8.3 per cent. The US banking sector saw similar falls in early trading.

Sarkozy breaks off holiday to address fears for France's AAA credit rating

Top ratings agencies lined up to back France's credit standing yesterday amid speculation that Europe's second-largest economy could follow the US in losing its coveted AAA rating.

Moody's and Fitch repeated their assessment of France's creditworthiness, batting down rumours that Paris was in line for a downgrade. Their comments came a day after Standard & Poor's – the agency behind the US ratings cut – said France continued to merit an AAA rating, a point reiterated yesterday by S&P analyst Nikola Swann, who said the country had been more serious than the US in dealing with fiscal issues.

French President Nicolas Sarkozy also tried to soothe the jitters, interrupting his holiday to hold talks with ministers in Paris. Mr Sarkozy asked the Budget minister, Valérie Pécresse, and the Finance minister, François Baroin, to come up with ways to speed up the process of cutting France's debt burden, the biggest of Europe's AAA-rated states.

The plans are to be put to Mr Sarkozy, who went back to his holiday last night, and the Prime Minister, François Fillon, next week, with formal steps to be agreed later this month.