Europe Bank Stocks Hit By Worries Over Slowing Western Economies

European banking stocks suffered a sharp selloff Thursday as worries over slowing Western economies hit financial markets, with Morgan Stanley (MS) cutting its GDP growth forecasts for the euro area.

The revival of a proposal to impose a tax on European financial transactions at a recent meeting between German and French leaders was also weighing on banking stocks, said Arun Melmane, an analyst at Investec Securities. "There's not been any good newsflow in this sector for a while."

U.K. banking shares fell sharply, with Barclays PLC (BCS) down 4.8%, HSBC Holdings PLC (HBC) 3.4% lower, Lloyds Banking Group PLC (LYG) falling 4.8% and Royal Bank of Scotland Group PLC (RBS) 4.4% off.

Stocks on the Continent were also hit, with French and Spanish banks suffering heavy losses. Societe Generale S.A. (GLE.FR) was down 5.1%, Credit Agricole S.A. (ACA.FR) 3.5% lower and BNP Paribas S.A. (BNP.FR) 3.2% down. Banco Santander S.A. (STD) was 2.9% lower, while Banco Bilbao Vizcaya Argentaria S.A. (BBVA) was down 3.6%.

Dexia SA (DEXB.BT) was leading the declines in Belgium with an 8% slump. "It's just the volatility of the market," said Alex Koagne, a financial analyst at Natixis. "The underlying problem is that the situation in Europe is still very difficult. This is nothing on the fundamentals [of Dexia]."

Morgan Stanley warned earlier Thursday that it sees "material risk of outright recession," and cut its 2011 euro area GDP growth forecast to 1.7% from 2.0%, and its 2012 forecast to 0.5%, from 1.2%. Goldman Sachs, meanwhile, cuts the 2012 Global GDP growth forecast To 4.4% From 4.6%.

Morgan Stanley cited a number of new factors that are likely to weigh on growth in the second half the year, such as slower global trade growth, tougher term funding markets for banks and additional austerity measures announced in several countries.

For nearly two years, many investors and analysts have been arguing that the European banking sector is undercapitalized and overexposed to potentially risky debts of cash-strapped countries like Greece, Portugal, Ireland, Spain and Italy.

-By Michael Haddon, Dow Jones Newswires; 4420-7842-9289; [e-mail]

(Michelle Maatouk contributed to this article.)