French banks and other lenders exposed to Greece and other weak euro zone countries slumped on Tuesday after Greece's leader said he would put a bailout plan to a referendum, raising the risk of a disorderly default.
By 0830 GMT (4:30 a.m. EDT) the European bank index was down 5.3 percent at 134.3 points, giving up all the gains made on Thursday, when banks stocks rallied sharply after EU leaders and banks agreed to write off half Greece's debt as part of a wider euro zone rescue plan.
If Greek voters reject the unpopular bailout plan it could result in a "hard default," which could force banks to take losses of about 75 percent on their Greek sovereign bonds, trigger payouts on credit default swap insurance contracts, and raise the threat of a systemic risk, said Andrew Lim, banking analyst at Espirito Santo in London.
"If we get a hard default in Greece, it will exacerbate the situation with Italyand Spain. It just increases the problem of Italy going down the same route, and that's the real risk," Lim said.
France's BNP Paribas, Societe Generale and Credit Agricole all fell more than 10 percent. They are among the most exposed to Greece through sovereign debt holdings and loans to the country.
Shares in Deutsche Bank, Commerzbank and UniCredit all shed 8 percent or more, as the news sparked fears last week's deal will unravel and spread to Italy and Spain.