The FTSEurofirst 300 index of top European shares ended 3.36 percent lower at 853.88 points.
Credit Suisse led banks lower with an 8.8 per cent fall on market talk of a large trading loss. The bank declined to comment.
French bank Natixis slid 13.5 per cent after it said its core investment banking unit had a torrid time last month, while Barclays, Standard Chartered, Deutsche Bank and Societe Generale fell 5.2-7.5 per cent.
Swiss Life tumbled 20 per cent after warning on profits and ING fell 4 per cent after posting its first quarterly loss.
US Treasury Secretary Henry Paulson said he was backing away from buying troubled mortgage assets using a $US700 billion bailout fund, instead favouring a second round of capital injections into financial institutions that would match private funds.
"This is bringing uncertainty into the market, creating a sense that the Treasury doesn't know what it's doing," said Philippe Gijsels, strategist at Fortis in Brussels.
But he said that markets appeared to be overreacting.
"Now people are talking of re-testing the year lows. But newsflow should improve in the next couple of weeks with the earnings season behind us and the economic calendar quite light.
"We should be higher by the end of the year."
Top US electronics chain Best Buy slashed its fiscal 2009 profit forecast, underlining a weak picture of consumer spending.
And reflecting worries about the economy, oil fell more than 4 per cent to around $56.80 a barrel. Royal Dutch Shell, BP and Total fell 1.5-4.6 per cent.
Shares in German utility E.ON fell 6.1 per cent after 9-month results. Profits at some of its divisions failed to meet investor expectations and it halted its share buyback programme.
Across Europe, Britain's FTSE fell 1.5 per cent, Germany's DAX lost 3 per cent and France's fell 3.1 per cent.
The FTSEurofirst has lost 8 per cent so far in November after a 13-per cent loss in October, the worst month in six years.
Investors have seen every €100 invested in European equities at the beginning of the year wither away to around €57 as stock markets across the world tumbled due to a credit crisis that shook banks and slowed the economy.
Philipp Musil, a portfolio manager at Constantia Privatbank in Vienna, said he liked stocks that offered shelter from market uncertainty.
"We're putting money into defensives and like strong equity to total assets, strong total cash flow and a high dividend policy," he said.
Some defensive stocks did well.
Mobile telecoms were the strongest performing sector, with Vodafone up 6 per cent, extending gains from Tuesday, when its first-half update pleased analysts, who pointed to a revamped group strategy.
BT, which reports on Thursday, gained 2.3 per cent.
Among pharmaceuticals, AstraZeneca gained 2 per cent and GlaxoSmithKline rose 0.4 per cent.
Home sales continue to slide
Share market down 1pc at open
