LONDON — Concerns over the financial health of Europe's banks and the state of the U.S. economy sent stocks sharply lower Wednesday, a day after the Federal Reserve's pledge to keep extremely low interest rates for two more years temporarily calmed market jitters.
Shares in French banks took a particularly bad beating.
Societe Generale led the retreat, trading over 20 percent lower at one stage, before closing 14.7 percent down. Credit Agricole was also in the firing line, ending down 11.8 percent.
Both had traded even lower earlier, first because of worries France would lose its triple A rating but then on worries about the banks' financial health. The pressure on Societe Generale eased after the bank categorically denied what it called "all market rumours." Britain's Daily Mail newspaper also published an apology saying a Sunday report that the bank was in a "perilous" state and possibly on the "brink of disaster" had been incorrect.
The slide in European bank stocks was further evidence that Europe's government debt crisis remains a massive source of concern in the markets. Commerzbank AG saw its second-quarter earnings battered by a roughly $1 billion writedown from its exposure to Greek debt.
"Speculation surrounding French bank Societe Generale, down more than 20 percent at one point, has smashed banking stocks across Europe," said Will Hedden, a sales trader at IG Index.
In Europe, the FTSE 100 index of leading British shares closed down 3.1 percent at 5,007.16, while Germany's DAX fell 5.1 percent to 5,613.42. The CAC-40 in France ended 5.5 percent lower at 3,002.99.
The euro also slid 1.2 percent at $1.4192.
In the U.S., the Dow Jones industrial average was down 3.8 percent at 10,812, while the broader Standard & Poor's 500 index fell 3.4 percent to 1,132.
On Tuesday, Wall Street rallied hard after the Fed's surprise announcement that it would likely keep its Fed funds rate at near zero percent through 2013 to help the ailing U.S. economy, stocks have taken another pounding.
Over the past few weeks, markets have suffered a severe reverse amid worries over the U.S. economic recovery and the country's debt situation in light of a protracted debate in Congress to get the debt ceiling lifted. That contributed to last weekend's announcement by Standard & Poor's to downgrade the U.S.'s credit rating for the first time ever.
And in a sharp reversal of opinion, economists now believe there is a greater chance of another U.S. recession.
The other major market concern is Europe's debt crisis. Investors have grown increasingly worried that Italy and Spain could become the next European countries to have trouble repaying their debts. Greece, Ireland and Portugal have already received bailout loans because of Europe's 21-month-old debt crisis.
The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and even higher borrowing costs for the two countries.