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European stocks log steepest one-day fall this year as banks extend slide

German share price index DAX graph is pictured at the stock exchange in Frankfurt

By Sruthi Shankar and Ankika Biswas

(Reuters) -European stocks logged their steepest one-day fall this year on Monday on continued drag from banking stocks even as authorities stepped in to limit the fallout from the sudden collapse of Silicon Valley Bank.

The pan-European STOXX 600 index closed the day 2.3% lower, with bank, financials and insurer stocks, along with energy stocks, bearing the brunt of selling pressure.

European banking stocks dropped 5.7%, notching their worst two-day selloff since the Russia-Ukraine war broke out early last year.

Worries around the resilience of the sector's balance sheet in the face of SVB's collapse have rattled investors.

"Investors have been shaken by the events of the past few days, and are waiting with bated breath to see if repercussions in the financial sector will spill over and create pools of fresh problems," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

The wider risk-off moves sent Credit Suisse shares down 9.6% to a fresh record low.

Germany's Commerzbank slumped 12.7%, France's Societe Generale and Spain's Sabadell fell 6.2% and 11.4%, respectively.

HSBC dropped 4.1% after the British bank acquired the UK subsidiary of SVB for 1 pound, rescuing a key lender for technology start-ups in Britain.

However, euro zone banking supervisors saw limited consequences for the region's banks from the collapse of the U.S. lenders, while Moody's Investors Service noted that Europe's banks were unlikely to get hit by bond portfolio losses.

In addition, Morgan Stanley analysts noted that strong liquidity in European banks' balance sheet structure should avoid any forced unwinding or selling of bond portfolios.

The Federal Reserve and U.S. Treasury have announced a range of measures to stabilise the banking system and said SVB depositors would have access to their deposits on Monday. [.N]

Meanwhile, the stress in the financial sector has sparked expectations of a slowdown in the Fed's aggressive monetary tightening, with investors seeing a 68% chance of a 25 basis points (bps) hike next week, a drastic change from the 50-bps hike priced in previously.

Goldman Sachs no longer expects a rate hike from the Fed.

On the other hand, the ECB looks set to hike rates by 50 bps later this week.

Among others, Shell, BP and TotalEnergies SE lost between 4% and 5% tracking lower oil prices.

France's Sanofi SA dropped 1.7% on plans to acquire Provention Bio Inc for $2.9 billion.

(Reporting by Sruthi Shankar and Ankika Biswas in Bengaluru; Editing by Savio D'Souza, Uttaresh Venkateshwaran and Christina Fincher)