Europe stocks fall on weaker banks as RBS and HBOS sink

By Atul Prakash

LONDON (Reuters) - European stocks drifted lower on Tuesday as mounting concerns about the health of the financial sector hit banks, with shares in Royal Bank of Scotland and HBOS plunging about 40 percent.

The FTSEurofirst 300 index of top European shares ended 0.14 percent lower at 1,003.51 points after witnessing its worst one-day percentage fall on record on Monday. It is down about 33 percent so far this year.

Banking stocks were the biggest weighted sectoral losers, with Royal Bank of Scotland and HBOS hit by talk that the British government was mulling a possible bank recapitalisation plan with the country's lenders.

Commerzbank fell 14 percent, Barclays shed 9 percent and Lloyds TSB slipped 13 percent.

"Banks need measures to boost their capital, and without real measures from the authorities, it's not a few takeovers or isolated rescues that will help stop the crisis," said Sebastien Barthelemi, analyst at Louis Capital Markets in Paris.

"We need a strong move by governments. Each country has been reacting on its side, but we need something stronger to calm down markets."

Iceland's market authority, battling to stave off national bankruptcy after its banks took on massive debts in expanding overseas, took control of Landsbanki, the island's second-largest bank by value.

Banks have been hammered since the start of the credit crisis in mid-2007, which has prompted financial institutions to unveil massive writedowns of mortgage-related assets, forced Lehman Brothers to file for bankruptcy and triggered a flurry of government bailouts of embattled companies.