European stocks fell on Thursday, dragged down by the banking sector on heightened fears over lender exposure to the eurozone debt crisis and the potential impact of more recapitalisation.
Investors shrugged off approval by Slovakia of the revamped eurozone rescue fund and focused more on a European Central Bank warning of downside risks to the world economy.
At close, London's FTSE-100 was down 0.71 percent to 5,403.38 points, Frankfurt's DAX 30 index lost 1.33 percent to 5,914.84 points and Paris's CAC 40 ended the day down 1.33 percent to 3,186.94 points.
Elsewhere in Europe, Milan shares were down 3.7 percent, Madrid fell 0.92 percent and Amsterdam dropped 0.92 percent.
"Even if there was a return to a certain optimism in the past few days, there remains too many uncertainties regarding the debt crisis to get close" to the 3,300 point level in Paris, Arnaud de Champvallier of Turgot Asset Management said.
The euro edged down to $1.3732, compared with $1.3788 late in New York on Wednesday and the dollar fell against the yen to 76.88 yen from 77.24 yen on Wednesday.
On Wall Street, US stocks were lower with the Dow Jones Industrial Average down 0.85 percent to 11,420.43 points in midday trade.
The tech-heavy Nasdaq Composite slipped 0.27 percent to 2,597.78 points, while the S&P 500, a broader measure of the markets, fell 1.04 percent to 1,194.65 points.
"Although early losses are broad, the stock market's descent has been primarily driven by weakness in the financial sector," analysts at Briefing.com said.
European bank shares plunged after the French finance ministry warned that European lenders exposed to Greek debt will probably face greater losses than those already agreed to.
Ahead of a weekend meeting of G20 finance ministers in Paris, France said banks would probably be forced to write off more Greek debt than the 21 percent proposed in a July eurozone accord on a second bailout for Athens.
In their pre-G20 briefing, French officials said EU states would set up a mechanism to allow banks in difficulty to seek assistance but that the statutes of the European Financial Stability Facility would not change.
Banks have been asked to increase their core capital reserves so that they will be better able to cope with any losses on their holdings of bonds issued by weak eurozone states. French banks have a large exposure to Greece.
In Paris at close, BNP Paribas tumbled 5.67 percent, Credit Agricole plunged 5.68 percent and Societe Generale sank 6.69 percent.
In Frankfurt, Commerzbank stock plummeted 4.82 percent and Deutsche Bank was down 5.60 percent.
Hit by a Fitch ratings downgrade, in London Royal Bank of Scotland shares slid 6.39 percent and Lloyds Banking Group fell 5.48 percent.
European Commission president Jose Manuel Barroso called Wednesday for banks to "urgently" increase their core tier-one capital ratios and warned that those refusing to comply could be forced to abandon bonuses and dividends.
However, Deutsche Bank boss Josef Ackermann argued Thursday that recapitalising Europe's banks would not solve the crisis, adding that confidence needed to be restored in the health of countries' public finances.
"It's not the capital resources of banks that are the problem but the fact that sovereign debt has lost its status as a risk-free asset," Ackermann told a business congress in Frankfurt.
The little reassuring news there was came from eurozone holdout Slovakia where lawmakers ratified new powers to the EFSF, two days after voting the changes down in a political dust-up that toppled the coalition government.
However, investor sentiment took another heavy blow on Thursday after the European Central Bank warned of "downside" risks to the euro area which was facing "particularly high uncertainty".
"Downside risks notably relate to the ongoing tensions in some segments of the financial markets in the euro area and at the global level, as well as to the potential for these pressures to further spill over into the euro area's real economy," the ECB said in a monthly bulletin.
Asian markets rose Thursday, extending a recent rally on hopes that eurozone leaders will be able to hammer out a solution to the debt crisis.