ZURICH -- European bank stocks took a pummelling on Thursday as panicky investors sold shares in financial institutions suspected of being even remotely tainted by U.S. subprime mortgage woes.
The sell-off followed two days of firmer prices and appeared to have been triggered by a shock announcement from BNP Paribas that it had frozen three of its funds as a result of the subprime turmoil.
Even upbeat statements by banks appear unable to stem the fall. The DJ European banks index was down 2.06 percent at 1155 GMT, significantly below the FT Eurofirst index of Europe's top 300 companies, which shed 1.56 percent.
"I think it's all-round panic at the moment," said a London-based banking analyst with a major European bank, who said rumours were flying thick and fast in the markets.
The entire financial sector has been beset by price volatility, which has intensified as fears of tightening credit conditions have taken hold, and analysts say uncertainty could go on for weeks.
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"It's really like trying to catch a falling knife. People are selling anything with a past association with subprime. It's pretty indiscriminate," said the analyst.
French bank, which had earlier said its exposure to subprime was limited, said the subprime crisis prevented it from calculating the value of three funds, leading it to impose the temporary freeze.
The bank's CEO, Baudouin Prot, said only last week: "BNP Paribas has not been directly impacted in any significant manner by the current U.S. subprime crisis."
Earlier German state bank WestLB moved to quell market worries about its exposure to subprime, saying its investments in the sector were sound and not comparable to those of stricken German lender IKB.
The unease spread to European money markets, prompting the European Central Bank to make the highly unusual move of saying it stood ready to ensure their smooth functioning.
Traders said investors were staying out of the money markets because they feared subprime woes could hurt European banks and financial institutions and that liquidity may evaporate.
REASSURANCES IGNORED
BNP's shares were down 4.2 percent at 1130 GMT.
Even some banks which have reassured investors that they do not have any major exposure to subprime took a battering, suggesting some investors were not taking such statements from any bank at face value.
"BNP was very confident last week on subprime but a week later they are saying there are no prices available for some of the assets that they hold," said a London analyst.
Franco-Belgian bank Dexia was 5.36 percent lower and Commerzbank, which unveiled strong second quarter results on Thursday, also dropped 3.9 percent. Barclays was worst hit among British banks, shedding 4.28 percent.
"I think you get to a point where panic sets in and reality is forgotten," said Alan Webborn at SG Securities in London.
"I heard the Commerzbank conference call (with analysts). The chief financial officer has been reasonable and open and gave good disclosure on their subprime concerns," he said.
Dexia, the worst hit of the European banks, said as recently as Monday that its subsidiary Financial Security Assurance Inc (FSA) was well protected from the subprime market and would not cause any loses even if the subprime crisis deepened.
Adding to the sense of gloom on Thursday, Germany's Sal. Oppenheim said it temporarily closed an asset-backed securities fund it managed for Austrian investment firm Hypo KAG. The fund had a volume of 750 million euros ($1 billion).
Several analysts said rumours had been circulating which appeared calculated to deepen the sense of market disarray, to the potential benefit of investors with short positions.
WestLB's denial that it was in the throes of a subprime-fuelled crisis was followed by a statement by U.S. investment bank Goldman Sachs that it was "business as usual" at its Global Alpha hedge fund.
The statement followed speculation it was liquidating the fund. "Financial meltdown is not what banks are telling us (is going on)," said SG Securities' Webborn. "Someone is profiting from getting people to panic."
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