The Stoxx 600 Banks index finished 4.2 per cent lower, its biggest one-day fall since 11 February. It was pushed down by the likes of Deutsche Bank, which skidded 4.6 per cent to €14.06, and Credit Suisse, which fell 3.8 per cent to SFr12.08.
The FTSE 100 finished 1.86 per cent lower, at 6,115 points. Among UK-listed lenders, Barclays fell the most, tumbling 3.8 per cent to 169.4p, while Standard Chartered dropped 3.7 per cent to 515.5p and RBS fell 3.5 per cent to 214.2p.
On what is usually the quietest day for trading in the city, the rush to safer havens took its toll on equity markets, with just four stocks in the UK's top 100 listed companies scraping into the green. Rolls-Royce rose 0.7 per cent to 603.5p, while Fresnillo rose 0.25 per cent to 1,214p, Inmarsat rose 0.2 per cent to 703.5p and Rexam rose 0.08 per cent to 639p.
The picture was even bleaker on the continent, with the German Dax plunging not only below 10,000, but also 9,900 as it lost 2.5 per cent. The Cac 40 in Paris was also down 2.2 per cent to 4,3106.
Markets were "on a substantially less positive footing", Joshua Mahony at spreadbetters IG said.
"Pessimistic market sentiment has been hidden by the optimism of lower for longer rates at the Fed in response to last week's weak payrolls number. With Treasury yields hitting all-time lows, Gold rallying sharply and the riskier equities selling off, it is clearly a case of risk-off for financial markets today," he added.
|Barclays||Down 3.8 per cent|
|Prudential||Down 3.1 percent|
|RBS||Down 1.9 per cent|
|Lloyds||Down 1.3 per cent|
|HSBC||Down 1.5 per cent|
After climbing at the start of the week and some hefty ups-and-downs in the value of the pound, the focus has switched to bonds as we approach the weekend. The European Central Bank (ECB) started snapping up corporate bonds on Wednesday as part of its quantitative easing package.
"Markets have a razor-sharp focus on falling government bond yields right now," said Jasper Lawler, analyst at CMC Markets.
The prospect of lower interest rates and political uncertainty has caused investors to flock to safe government debt, pushing the price up as the yields fall. That, in return, has created excess supply in equities and commodities, with banks - heavily sensitive to monetary policy - and miners faring the worst.
"The move into bonds has been to the detriment of equities this week. The financial sector is the biggest faller across European stock markets since banks and insurance companies have the most to lose from the ongoing low rates environment," added Lawler.