Investors feared the troubles facing the banking sector might worsen the economy's outlook and constrain lending, a key pillar of business and consumer spending and vital for profits.
Concerns over Europe's banking and credit woes — including a multi-nation rescue of one of Europe's biggest banks and the bailout of a second bank in Britain — were driving down markets, said Clem Chambers, CEO of ADVFN, Europe's leading stocks and shares website.
"Everybody is dead scared," Chambers said. "Nobody knows where it's going to stop."
"There's no silver bullet for what's plaguing the financial markets," said William Kaye, managing partner of the Great Asia Hedge Fund in Hong Kong.
Kaye believes the U.S. government should have allowed financial institutions to fail if they made irresponsible bets on subprime mortgages and other risky investments.
"Why not let them go broke?" he said. "People who do stupid things should get punished." He said the Paulson bailout reminds him of the piecemeal way Japan let a banking crisis drag on throughout the 1990s by periodically rescuing banks instead of allowing them to go out of business.
Monday's plunge in European bank stocks came amid announcements that:
• The governments of Belgium, the Netherlands and Luxembourg are pumping $16.4 billion into Fortis to keep it solvent. The Belgian-Dutch bank and insurance company is one of Europe's 20 biggest banks.
• The British government is nationalizing troubled Bradford & Bingley, a mortgage bank specializing in loans to buyers of rental property. It was the second British taxpayer bailout of a mortgage lender in a year.
• The German government is guaranteeing credit that lenders are extending to liquidity-stressed Hypo Real Estate Holding, a Munich-based bank and property conglomerate.
Europe's big nations last week had rebuffed urgings from U.S. Treasury Secretary Henry Paulson to set up their own bailout plans similar to the $700 billion rescue effort.
German Finance Minister Peer Steinbrueck said last week that the year-old global financial crunch was a U.S. problem that it needed to solve. Europe's other big industrial democracies — Britain, France and Italy — agreed, he said.
However, British Prime Minister Gordon Brown hasn't ruled out following suit if the situation worsens.
Until investors know where banks stand, Chambers said, European markets will remain volatile."It will be shooting up one minute and down the next," he said. "There's going to be violent mood swings."
Contributing: Jeffrey Stinson reported from London; Paul Wiseman reported from Hong Kong; Associated Press, Reuters