LONDON, Sept 30 (Reuters) - Europe's top banks slumped on Tuesday after U.S. lawmakers rejected a $700 billion bailout plan for the financial industry in a shock vote and Dexia (DEXI.BR) became the latest bank to need a big bailout.
By 0715 GMT the DJ Stoxx European bank index .SX7P was down 3.4 percent at 251.4 point, just above a 2-month low. The drop was not as steep as some had forecast, which one dealer said was due to an 8 percent fall on Monday and hopes the U.S. rescue plan can be revived.
The biggest fallers included KBC (KBC.BR), down 18 percent, and Royal Bank of Scotland (RBS.L) and HBOS HBOS.L which both fell 12 percent. UBS UBSN.VX, Lloyds TSB (LLOY.L), Unicredit (CRDI.MI) and Credit Agricole (CAGR.PA) all fell over 5 percent.
Irish banks surged, however, in marked contrast to the rest after the Irish government announced it will guarantee all bank deposits for two years. Allied Irish (ALBK.I) was up 19 percent.
"The domino effect of bank failures has started and is now spreading to Europe, just look at Fortis FOR.BR and Dexia," said Sebastien Barthelemi, analyst at Louis Capital Markets in Paris.
"For a long time, we feared the systemic risks, now we're watching the dominos collapse one after another. It's scary," he said.
U.S. and Asian stocks tumbled after the U.S. bailout plan was rejected. [nLU78347]
"The failure of the U.S. Congress to approve the Paulson plan was not in the script. There were many things wrong with this plan, but it was the only one on offer and it did help the situation," said Gerard Lyons, chief economist at Standard Chartered. "A deep and long U.S. recession should not be ruled out."
Belgian-French group Dexia received a 6.4 billion euro capital injection from Belgium, France, Luxembourg and key investors, following several big state bailouts for banks on Monday and adding to fears that more rescues or bank failures will be seen, dealers said. [nLU99270]
Dexia shares were suspended but rival Fortis, which was part nationalised on Monday, fell 4 percent after ING (ING.AS) said it would not buy its ABN AMRO Dutch business. (Reporting by Steve Slater in London and Blaise Robinson in Paris; Editing by Quentin Bryar)