The FTSEurofirst 300 index of top European shares lost 7.6 percent to finish at 851.23 points—its lowest close since July 2, 2003.
The pan-European benchmark fell as much as 9.9 percent earlier in the session and had its worst week on record with a drop of 22 percent.
"The new lows we've seen in stock markets this week are the result of panic selling," said Joost van Leenders, asset allocation specialist at Fortis Investments.
The DJ Stoxx European bank index fell 10.4 percent, with Royal Bank of Scotland down more than 25 percent, Credit Suisse and Deutsche Bank dropping over 16 percent each, Barclays falling more than 14 percent and Societe Generale shedding 13 percent.
Insurance shares lost 9 percent as Aegon fell almost 17 percent, Legal & General 16 percent, Old Mutual and ING Groep both nearly 13 percent, and Swiss Life and Swiss Re 12.5 percent each.
"There is simply panic and hopelessness. This is a bubble in reverse: many market participants feel and believe that the correction is going too far, but no one has the strength of going against the flow," UniCredit said in a note.
Distrust
Erste Bank pointed out that interbank market risk premiums had risen despite the central banks' liquidity injections.
"The distrust of the banks is likely to continue in the light of the negative reports of bank failures," Erste said in a note, estimating that financial institutions would face "billions" in additional write-offs.
Investors across asset classes were waiting for the outcome of meetings in Washington involving Group of Seven finance ministers and central bankers and the International Monetary Fund. Top of the market participants' wish-list was coordinated action to revive the frozen interbank and money markets.
"If credit markets do not open up and financial markets cease to operate, the downside is so substantial it is impossible to put a number on a floor in equity markets," Credit Suisse said in a global equity strategy note.
Companies have begun to feel the pinch of the credit squeeze.
"Being able to secure any kind of financing is as we speak almost impossible, whereas banks were still open for business a few weeks ago," said Olivier Elamine, chief executive of German office property company Alstria.
"Having any kind of unfunded short-term financing requirement, regardless of the amount, can turn out being very difficult to cover," Elamine told Reuters, adding that Alstria itself had no funding needs until November 2011.
Morgan Stanley said the current financial market environment represented "a clear and present danger" to the global economy.
"Pricing across a broad array of asset classes has moved to extreme levels of risk aversion as fear has dominated fundamentals in most markets," Morgan Stanley said in a note.
Recession
Gold fell 2 percent and the price of copper fell 14 percent to its lowest level in nearly three years on recession fears, hitting shares in mining companies.
Vedanta fell 13 percent while Rio Tinto and Kazakhmys dropped almost 12 percent each. The DJ Stoxx basic resources index, which includes miners, ended with a loss of 9.5 percent.
"We would avoid the industrial commodity plays which concerningly appear to be discounting just a 2 percent fall in industrial commodity prices," Credit Suisse said.
Recession-linked signs of weakening demand also hit crude oil prices, which fell almost 7 percent to a one-year low beneath $80 a barrel.
Energy stocks suffered, with oil majors Royal Dutch Shell, BP and Total dropping between around 8 and 9 percent.
Britain's benchmark FTSE 100 index lost 8.9 percent, the French CAC fell 7.7 percent and Germany's DAX shed 7 percent.
"A turn of the trend is not in sight at the moment, especially because of deteriorating economic growth prospects," LandesBank Berlin said in a note.
But M.M. Warburg Investment Research note saw prospects for a recovery.
"Abundant liquidity, low short-term interest rates, expansive fiscal policies, governments taking over bad loans and the partial nationalisation of illiquid banks are measures that will prevent an extreme and widespread credit squeeze," the German bank said.
"And so one day the storm that is currently sweeping over the financial markets will calm down," M.M. Warburg added.
