http://finance.yahoo.com/news/Banking-fears-grip-European-apf-14096348.html

LONDON (AP) -- European stock markets fell Monday with banks in free fall as investors fretted over a second British government bailout of the sector in three months and some predicted that cash-strapped Royal Bank of Scotland Group PLC would end up fully nationalized.

Europe's early gains were erased as the investors were spooked by fears that the British government's latest move was a step toward full nationalization of one or more banks, and that other governments will have to step in to save their leading banks.

Germany's DAX closed down 50.14 points, or 1.2 percent, at 4,316.14, while France's CAC-40 fell 27.06 points, or 0.9 percent, at 2,989.69.

Most attention was on the FTSE 100 index of leading British shares, which was down 38.59 points, or 0.9 percent, at 4,108.47, even though the British government said it would be creating a progam to insure bank loans in the hope that the banks will start lending again.

Any hopes that the government had that the announcement would ease the stock market pressures on the banks evaporated as they suffered another day of frenzied selling.

Fears focused on the Royal Bank of Scotland which saw nearly two-thirds of its market value wiped out following its disclosure that it will likely report a full year loss of 28 billion pounds ($41.3 billion), which would be the biggest loss ever reported by a British company. Shares traded at only 12 pence (15 U.S. cents) a share.

Among the raft of measures unveiled earlier, the British government said it will be increasing its stake in RBS to 70 percent from 58 percent by converting preference shares into ordinary shares.

"It is clear from the markets reaction today that it increasingly believes that RBS is to end up fully in government ownership," said Nic Clarke, an analyst at Charles Stanley stockbrokers in London.

The other remaining British banks suffered too, with newly-merged Lloyds Banking Group PLC down by nearly a third. And Barclays PLC, which had earlier recouped most of its 25 percent decline on Friday, was back under pressure, with its shares 10 percent lower.

"Sentiment and confidence is absolutely shot to pieces in the banks and the markets are voting with their feet," said Howard Wheeldon, senior strategist at BGC Partners in London.

The British banking sector's latest stock market woes came after the government unveiled a new plan that would require banks to identify their riskiest assets and allow them to pay a fee to insure them with the government in return for lending more money. By offering to insure bank loans, the government is exposing taxpayers to billions of pounds of potential losses.

In addition, the government gave the Bank of England the green light to, in effect, start printing money by buying 50 billion pounds ($74 billion) of whatever bank assets it considers to be necessary.

The problems in Britain's banking system sent shockwaves through Europe too.

In Germany, Deutsche Bank AG, which last week reported a 4.8 billion euro ($6.4 billion) loss for the fourth quarter, sank 8 percent while Commerzbank AG was 4 percent lower. In France, BNP Paribas SA and Societe Generale SA were down too.

The problems potentially facing Europe's banks were stoked last week by Citigroup Inc.'s announcement that it will split its operations in two, separating its traditional banking business from the company's riskier assets, as it posted a massive $8.3 billion fourth quarter loss. Bank of America Corp. also revealed a $2.4 billion quarterly loss and had to tap the U.S. government for a cash injection of $20 billion in exchange for stock.

Stock markets around the world had started 2009 on a relatively strong footing, glad to have put the previous year behind them and hopeful that the incoming Obama administration would be able to limit the length and depth of the recession in the U.S. with its massive stimulus plan.

Those hopes of a turnaround in the world economy by the middle of this year have evaporated as investors grappled with increasingly grim economic and corporate data from across the world.

Earlier, most Asian stock markets following a rally on Friday on Wall Street.

Japan's Nikkei 225 stock average edged up 26.70 points, or 0.3 percent, to 8,256.85, South Korea's Kospi gained 1.4 percent to 1,150.65 and Hong Kong's Hang Seng recovered early losses to rise 0.6 percent to 13,339.99.

Shanghai's benchmark rose 1.7 percent and markets in Australia and Singapore also gained. Thailand and Malaysia retreated.

Wall Street was closed Monday for the Martin Luther King Day national holiday, and the focus will be on Barack Obama's inauguration as President when trading resumes Tuesday.

On Friday, the Dow Jones industrials rose 68.73 points, or 0.8 percent, to 8,312 and the S&P500 gained 9.9 points, or 1.2 percent, to 858.50.

Oil prices continued to languish with light sweet crude for February delivery down $2.36 at $34.15 a barrel in electronic trading on the New York Mercantile exchange.

The dollar was down 0.4 percent to 90.37 yen while the euro fell 1.2 percent to $1.3129.