ZURICH -- European banks suffered a severe mauling on Thursday with investors dumping stocks as near-panic set in, driven by a widening crisis in U.S. subprime mortagages and tightening credit.

The DJ Stoxx European banking index plunged 4.56 percent in one of its biggest one-day falls in years, helping to drag down the FT Eurofirst index, tracking Europe's 300 biggest companies, by 2.98 percent at 1220 GMT.

Deutsche Bank was one of the worst hit, tumbling 5.84 percent as investors appeared to ignore assurances from the bank that it was unharmed by the subprime turmoil.

In Germany, DWS, the mutual-fund arm of Deutsche Bank, said its ABS fund remained open despite big investor withdrawals.

"It is pretty indiscriminate. Even if banks say they don't have direct exposure, people are worried about indirect exposure and contagion effect," said an analyst at a U.S. investment bank in London who asked not to be identified.

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The European Central Bank stepped in for the second day running to calm credit markets, saying it would add money through the weekend, but the move had little impact on the dark mood on equity markets.

Banks with exposure to Germany, the country which has been worst hit by the backwash from the subprime crisis, also took a battering.

Italy's UniCredit, owner of Germany's HVB retail bank operation, dropped 5.05 percent. Italian banks have until now not been relatively untarnished by subprime worries.

"Italian banks are down with the (European banking) sector. There is a bit of a panic and people sell whatever bank stock they have, particularly if exposed to markets such as Germany," said one bank analyst who asked not to be named.

ABN CONTENDERS HIT

Germany's financial regulator BaFin has said it is looking into a 17.5 billion asset-backed securities vehicle which is part of state bank SachsenLB, adding to concerns, although the bank said it has enough liquidity.

Nearly all the main parties to a bidding battle for ABN AMRO saw their shares plunge, with the Dutch bank down 8.53 percent on rumours that Fortis, part of a bidding consortium for ABN led by Royal Bank of Scotland, may have trouble funding its share of the deal.

RBS shares were hammered down by 6.59 percent and shares in Barclays, also bidding to take over ABN, were down 6.97 percent. Traders were sceptical of rumours that Barclays was thinking of abandoning its bid for ABN.

Fortis' own shares were down only 2.78 percent.

Santander, the third member of the RBS-led consortium, got off more lightly, its shares falling 3.1 percent.

BNP Paribas, whose shares plunged on Thursday after it said it was temporarily halting redemptions and investments in three funds with exposure to U.S. subprime, took another pummelling on Friday, its stocks dropping 4.83 percent.

"The banking sector is being hammered by the subprime issue. There is a general feeling that the subprime issue is now spreading into the European marekt as well," said a trader.

"It's not just confined to the U.S., which is why you see all these big banks being hit badly."

Switzerland's two big banks, UBS and Credit Suisse, which have both been involved in subprime investments in the United States were lower by 4.09 percent and 3.95 percent respectively.

UBS, which reports second quarter results next Tuesday, shut down its hedge fund Dillon Read Capital Management (DRCM) in May after it was badly hit by subprime losses and some investors are worried there may be more bad news to come.

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