By Margot Patrick, Patricia Kowsmann and Paul J. Davies 

Markets found little solace in the European Central Bank's moves to protect the economy from the impact of the coronavirus outbreak, with European stocks falling 10%, adding to investor worries that the selloff is creating paralysis in the world financial system.

The ECB rolled out cheap loans for banks at an interest rate as low as minus 0.75%, and temporarily stepped-up bond purchases, including those of private companies.

ECB President Christine Lagarde suggested that the central bank wouldn't act to support southern European government bonds if they came under pressure.

"We are not here to close spreads, there are other tools and other actors to deal with these issues," Ms Lagarde said. Instead she urged governments to act to support growth.

But what it didn't do Thursday was to cut its key interest rate, which investors had been expecting after rate cuts from the Federal Reserve and other central banks over recent days.

"It's brutal," said Sebastien Galy, a senior macro strategist at Nordea Asset Management. "If you don't get a more negative interest rate by the ECB, by definition it's a disappointment."

In a sign of the dramatic market reaction to the ECB package, yields on Italian government bonds soared to 1.73% from 1.26%. Italy, at the epicenter of the crisis, has some of the region's weakest banks, seen as most in need of help given the downturn in the economy. Meanwhile, the euro slid more than 1% against the dollar.

National stock indexed in France, Germany and Italy were all down around 10%. Shares in European banks took the brunt of the selling on the stock market, with the Stoxx Europe Banks Index down more than 12% for the day, taking its fall over the year to date to 36%.

French banks with large oil sector exposures were down by double digits after the ECB announcement, with BNP Paribas SA off 11% and Natixis SA losing 14%. ING Groep NV, also heavily exposed to energy companies, slumped more than 15%.

Deutsche Bank, considered one of Europe's most troubled lenders, fell 14.2%.

Investors are increasingly concerned banks could deplete their capital with large loan provisions from the first quarter onward, as borrowers including airlines, oil companies and retailers are sent into a tailspin from virus containment measures.

Banks with exposure to transport, retailers and energy have been among the hardest hit since a stock market rout quickened on Monday, and many analysts say central banks and governments will have to do far more to stabilize the sector.

Despite the immediately negative market reaction, the steps taken by the ECB were significant, analysts said. These include allowing banks to temporarily lower capital and liquidity levels below current requirements. These are moves that would have been unthinkable just a couple of weeks ago for a regulator that has repeatedly told lenders to raise them as a reaction to the last financial crisis.

Write to Margot Patrick at margot.patrick@wsj.com, Patricia Kowsmann at patricia.kowsmann@wsj.com and Paul J. Davies at paul.davies@wsj.com

(END) Dow Jones Newswires

March 12, 2020 11:31 ET (15:31 GMT)