Europe's banks rocked by Bear Stearns fallout

By Steve Slater

LONDON (Reuters) - An emergency rescue of Wall Street bank Bear Stearns on Sunday raised fears that rivals face further big hits on risky assets and few banks are safe from deepening turmoil, hammering European bank shares.

Shares in blue-chip banks including the Royal Bank of Scotland, Barclays and HBOS and Switzerland's UBS all fell over 8 percent on Monday.

The sell-off was sparked by news JPMorgan Chase will buy Bear Stearns for just $2 a share. The deal has underlined the risks banks are facing as the U.S. mortgage crisis deepens and the rock-bottom price -- more than 90 percent below the Bear Stearns share price at Friday's close -- raised questions over valuations in the banking sector.

"If you get a crisis of confidence in the wholesale banking space and something the size of Bear Stearns could go under, then people start to panic. You get a real fear factor," said Simon Maughan, analyst at MF Global.

Dirk Hoffman-Becking, analyst at Sanford Bernstein, said European capital markets banks were better positioned than U.S. rivals. "But in the end nobody is safe," he added.

"Given that one of the major players in this industry, though it was the smallest and most exposed to fixed income earnings, had experienced something not far off a run on the bank, we recommend investors maintain extreme caution on the European capital markets banks," Hoffman-Becking said.

"We would expect the stocks to sell off from here, irrespective of longer term outlooks."

By 10:00 a.m. the DJ Stoxx European banking sector index was down 5.3 percent at 314, its lowest level since August 2004.