Fear of Greek tragedy triggers another stockmarket sell-off

Stock market investors endured another rocky ride yesterday, with shares in European banks falling to their lowest level in more than two years amid concerns that Greece could default on its debts.

The fears were supplemented by the results of an auction of Italian treasury bills that saw Rome's cost of borrowing for 12 months spiral up to its highest level in three years.

Earlier, the German Economy Minister, Philipp Rösler, raised the prospect of a Greek default, saying: "To stabilise the euro, there can no longer be any taboos." This includes the possibility of an "orderly bankruptcy of Greece", he warned in comments over the weekend, rattling nerves across dealing rooms as traders returned to work.

Market sentiment was already fragile following the resignation last week of Germany's Jürgen Stark from his position on the European Central Bank board. Mr Stark opposed the ECB's controversial programme to buy government bonds in an attempt to soothe market nerves.

The apparent disunity at the top of the eurozone's monetary authority, along with talk of further problems in Greece, higher borrowing costs for Italy and lingering concerns about global growth, kicked off what was the latest in a series of sell-offs across stock markets. London was caught up in the rout, with the FTSE 100 shedding 1.6 per cent of its value to close at 5,129.6 last night.

In Germany, the main stock market was 2.3 per cent lower, while the Paris exchange fell by 4 per cent as the news of an explosion at a French nuclear site compounded the stress. The Italian market was also down by 4 per cent, while Spanish stocks fell by 3.4 per cent.

The Stoxx Europe 600 banks index, which tracks the big European and British lenders, fell by 4.6 per cent to its lowest level since March 2009. While London-listed banks responded to the Vickers Commission report on banking reforms, France's Société Générale and Credit Agricole saw their shares slump by nearly 11 per cent each amid the turmoil. Local peer BNP Paribas fared even worse, sliding by more than 12 per cent last night.

The weakness came despite SocGen's chief executive, Frederic Oudea, doing his best to reassure investors with plans for fresh asset sales and cost reduction measures. In an attempt to counter concern about the recent share price falls across the French banking sector, Mr Oudea said the country's lenders were "solid". "There is extreme nervousness and volatility on financial markets," he said.

His comments came as it emerged that the bank was considering legal action against The Mail on Sunday newspaper over allegations – since retracted – published last month that it may be "on the brink of disaster".

The Governor of the Bank of France also insisted yesterday that French banks were stable. "No matter what the Greek scenario, and whatever measures must be passed, French banks have the means toface up to it," Christian Noyer said. Although the markets pared some losses in the afternoon, fear was the dominant sentiment, with French banks also being hit by speculation that the Moody's agency might downgrade their credit ratings.