Europe shares plunge in early trade as banks slide

LONDON, Oct 8 (Reuters) - European shares tumbled 4 percent in early trade on Wednesday, led lower by banks, as investors across the globe dumped shares amid mounting jitters about the financial system and a deep recession.

At 0721 GMT, the FTSEurofirst 300 index of top European shares was down 4.1 percent at 962.47 points after hitting a four-year low of 959.60.

The index has already lost about 11 percent this week, on track to record its worst weekly performance since mid-2002.

Banks were the hardest hit, with UniCredit down 10 percent, Dexia falling 10.3 percent and Societe Generale slipping 6.7 percent.

Commonwealth Bank agreed to buy struggling British bank HBOS's Australian unit BankWest and other assets for a cheap A$2.1 billion ($1.5 billion). HBOS rose 20 percent.

The worst financial crisis since the Great Depression, which has heightened gloom about the global economy, forced Britain to announce new measures to help the banking sector.

The UK government unveiled a multi-billion pound rescue package for British banks that included plans to inject up to 50 billion pounds of government money into the country's biggest operators.

Royal Bank of Scotland jumped 9.8 percent but Barclays fell 6 percent and Lloyds fell 2.4 percent.

The decision followed days of crippling pressure on banks, some of which have lost nearly half their value on the stock market amid investor fears they could collapse if they are not handed a massive liquidity lifeline.

"The provision of extra liquidity will hope to free up lending in the short to medium term. The hope is that this will kick-start the banking sector once again, and breathe a much needed air of confidence back into the system," said Chris Hossain, senior sales manager at ODL Securities Ltd.

"The risk is that if this doesn't work, where do we go next? A co-ordinated rate cut would logically seem to be the next step, but after that, there isn't much more we can do."

The gloomy outlook continued to hurt global markets, with Japan's Nikkei average .N225 tumbling 9.4 percent on Wednesday and U.S. stocks sliding more than 5 percent overnight.

Federal Reserve Chairman Ben Bernanke on Tuesday cautioned that downside risks to economic growth had worsened and signalled a readiness to lower interest rates.

Spanish Prime Minister Jose Luis Rodriguez Zapatero late on Tuesday said Spain will raise its guarantee for deposits in its banks to 100,000 euros and set up a 30 billion euro fund to buy assets from banks and keep credit flowing to the economy.
On Wednesday, energy stocks also fell, tracking a sharp decline in crude prices that retreated below $88 a barrel as concerns the global financial crisis will crimp oil demand overshadowed signs that OPEC producers may consider a supply cut.

BP , Royal Dutch Shell , gas producer BG Group and Tullow Oil shed between 3.5 and 5.7 percent.

Mining stocks were also sharply lower.

(Reporting by Atul Prakash)