European blue-chip indices had a rough start to the week, as bank shares got hammered, traders digested an unusually dismal US jobs report and fears resurfaced over the debt crisis in the eurozone.

Germany's DAX lost 5.28 percent to finish the day at 5,246 points - a two-year low. France's CAC 40 dipped below the 3,000 mark for the first time since July 2009 and London's FTSE 100 fell 3.58 percent.

Markets in the US were closed for the Labor Day bank holiday. On Friday, the widely-watched monthly employment report showed the US economy added no jobs in August, leaving the unemployment rate at a stubbornly high 9.1 percent.

Investors were grappling with a number of problems, causing a mood on the markets reminiscent of the downturn in 2008, after the collapse of US bank Lehman Brothers.

Banking blues

"The situation for banks is more dramatic than it was in 2008," Ulrich Schröder, head of the German government-backed KFW Bank, said in Frankfurt on Monday.

"In 2008, governments were still able to support their banks. Now this is simply no longer possible," he added, with most governments' finances still reeling from the last crisis. Banks are currently finding it difficult to raise even long-term financing, according to Schröder.

Josef Ackermann, the chief executive of Germany's biggest bank Deutsche Bank, chimed in with the gloom, saying banks "were not out of the danger zone" and that "all this [the situation on the equity markets] looks very much like the autumn of 2008."

European banking stocks were hammered across the board on Monday, the Dow Jones STOXX Europe 600 banking index closed down 6 percent to its lowest level in 29 months.

Last week, Asian, European and US investment banks were sued by the US Federal Housing Finance Agency for allegedly mis-selling mortgage-backed securities, which helped trigger the last crisis that led to the collapse of Lehman Brothers. In addition to the US lawsuit, Deutsche Bank is being investigated by the UK's Serious Fraud Office (SFO), also in connection with asset-backed securities.

Debt woes

Meanwhile, the eurozone's sovereign debt crisis continued to cast a shadow over the markets. Yields on Italian and Spanish government bonds hit their highest levels in nearly a month on Monday and were expected to rise further as pressure mounted on Italy, the eurozone's third-largest economy, to get its fiscal house in order.

Investors were also concerned over the bloc's ability to act as a political unit to contain the crisis. On Sunday, German Chancellor Angela Merkel was further weakened by a disappointing election result for her Christian Democrat party in the eastern state of Mecklenburg-Western Pomerania. Her junior partners at the federal level, the Free Democrats, failed to even make it into the state parliament.

On Wednesday, Germany's highest court will rule on German involvement in the region's bailout fund for Greece and other highly indebted countries, adding to the uncertainty on the markets.

Chancellor Merkel was forced late Monday to reject calls for Greece to be thrown out of the eurozone, amid growing dissent from within her own party to her European policies.

"I think that if we did [remove Greece], we might set off a domino effect that would be extremely dangerous for our monetary system," she told reporters in Berlin.

European Central Bank President Jean-Claude Trichet on Monday called for the bailout fund to be "immediately" strengthened, and urged more structural reforms to boost the flagging financial sector.

Trichet's successor-designate, Italy's Mario Draghi, also urged eurozone countries not to rely on its supportive bond-buying program forever, a criticism also leveled at his own country, where Prime Minister Silvio Berlusconi has backtracked on planned austerity measures.

Author: Nicole Goebel, Darren Mara (Reuters, dpa, AP)
Editor: Nancy Isenson