The pan-European FTSEurofirst 300 slumped to its lowest level since August 2013 on Thursday after share markets across the continent closed sharply lower, with London down 2.4 percent, Frankfurt 2.9 percent, Paris 4.1 percent and Milan 5.6 percent.

The European shares index has lost 16.4 percent so far this year. But a drop by 10.8 percent in first few days of February has set it on course for its biggest monthly fall since the financial crisis of 2008.

Banks were among the worst performers amid concerns about the industry's profitability in a low-growth, low-interest rate environment.

Banking crisis revisited

European banking shares were down over 5 percent on Thursday adding to pressures on the sector which has lost around 27 percent so far this year.

Jawaid Afsar, senior trader at Securequity, told the news agency Reuters that the earnings reported by some of Europe's biggest banks had "done little to revive investors' confidence."

"Banks have been hit hard and further steep weakness can not be ruled out in the near-term. Margin pressure is becoming a big concern for the sector," he added.

Among the biggest fallers in the bank sector was Societe Generale, down 11.4 percent after it posted a lower than expected rise in fourth-quarter net income. Shares in Germany's biggest lender, Deutsche Bank, slumped by more than 6 percent after jumping 16 percent on Wednesday in a roller-coaster ride caused by doubts about the bank's ability to repay debt.

Generally, investors increasingly worry that the low or even negative interest rates central banks have brought in to prop up economic activity may be damaging lenders. Negative rates have hit banks ability to earn margins on interest rates and are one of several issues facing the sector.

"Negative interest rates have become a real sore point because of the way they impair banks' ability to do business," said CMC Markets UK analyst Jasper Lawler.

The International Monetary Fund has also expressed concern about recent sharp share price declines for European banks, as a robust banking sector was needed to sustain economic recovery.

Recession in the US looming?

Uncertainty among financial investors even increased after congressional hearings of US Fed chief Janet Yellen on Wednesday and Thursday.

Asked if the United States could be facing recession amid the global downturn, Yellen downplayed the chance of a contraction in the economy. But she said the US central bank was "absolutely" taking into consideration the risks from economic problems in other countries and regions, adding it was "premature to make a judgment" on the impact of market turbulence.

Art Hogan of Wunderlich Securities tied Thursday's sell-off to the drop in oil prices, but said Yellen's remarks likely contributed to the poor sentiment. "I don't know that there's anything reassuring coming out of her testimony," he said.

Flight to safety

Risk-averse investors are meanwhile fleeing to the safe haven of German 10-year government bonds, pushing down the rate of return to 0.58 percent. In the United States, yields on benchmark 10-year US Treasury notes also dropped, hitting 1.53 percent -their lowest level since August 2012,

By contrast, the rates of return jumped on the debt of crisis-stricken eurozone nations such as Greece and Portugal.

Another safe-haven asset, gold, surged to its highest in a year, with the spot price up by about 5 percent, at $1,255 an ounce.

Brad McMillan, chief investment officer for Commonwealth Financial Network in Waltham, Massachusetts painted a gloomy picture, suggesting central banks' aggressive monetary easing of the past several years may not come to fruition.

"The central banks have been taking extraordinary policy actions...and now we're seeing that it hasn't been as effective as everyone had been assuming," he told Reuters. "When you add in the fact that the European banking system is under serious threat right now, you could actually see a path to the kind of systemic crisis that we had in 2008."

uhe/kd (AFP, Reuters, dpa)