LONDON - EUROPEAN shares fell more than 4 per cent on Monday as global recession fears hit banks and energy shares, with Volkswagen a rare exception as Porsche disclosed its increased stake in the carmaker.

By 7.33 pm the FTSEurofirst 300 index of top European shares was down 4.3 per cent at 794.28 points, adding to Friday's decline of 4.9 per cent, although it was off a session low of 784.29.

'It is all following from the panic seen in the Far East. The whole thing has gone well beyond what is deemed as sensible. There is probably a lot of distressed selling, hedge funds or mutual funds having to meet redemptions,' said Mr Mike Lenhoff, strategist at Brewin Dolphin.

'The market seems to be discounting a severe recession and is focusing on the prospect of a downturn which is longer and deeper than expected,' added Mr Lenhoff.

Japanese stocks tumbled to 26 year closing lows on Monday and most other Asian markets fell heavily in chaotic trade as investors feared a flurry of central bank moves would not be enough to stave off a global recession.

Banks took the most points off the European index. HSBC, BNP Paribas, Societe Generale and Deutsche Bank were down between 8.9 and 15.7 per cent.

'Financials are down a lot. I don't think there will be much let up until we are basically well into the recession and investors feel there is going to be an end to it,' added Mr Lenhoff.

Energy shares were also lower. Crude fell by 3 per cent as an emergency production cut by OPEC was shrugged off by traders anxious about the onset of a deep recession.

BG Group, BP, Royal Dutch Shell and Total were down between 6.6-10 per cent.

Pharmaceutical stocks were also in the doldrums as European drugmaker Merck trimmed its full-year operating margin target.

Roche, Sanofi-Aventis and AstraZeneca were down between 1.7-4.9 per cent.

VOLKSWAGEN JUMPS ON PORSCHE STAKE NEWS

Volkswagen jumped 86.6 per cent after sports carmaker Porsche said on Sunday it had raised its VW stake to 42.6 per cent of votes and controlled a further 31.5 per cent via cash-settled options. Analysts said the news would intensify a short squeeze in VW shares.

British bank HBOS also bucked the downtrend, up 2.5 per cent.

British Prime Minister Gordon Brown said in the Financial Times over the weekend the proposed merger between LloydsTSB and HBOS was the right step to save the bank as no other bidders had come forward.

National Bank of Greece gained 8 per cent. Greece's big banks, which have agreed to a 28 billion euro government rescue plan, said the scheme will enable them to get state funding if and when needed and be on a par with European peers.

Underlining worries on the macroeconomic front, the German Ifo index which measures indications about German business sentiment fell to its lowest level since May 2003 on expectations the export sector will take a big hit from weakened foreign demand.

'The Ifo business expectations were consistent with the view that prospects are not good and that a recession is taking shape,' added Mr Lenhoff.

At 10.00pm US new home sales data will give the latest snapshot of the state of the US housing market.

Across Europe, the FTSE 100 index was down 3.8 per cent, Germany's DAX slipped 3.2 per cent and France's CAC 40 index was 5.3 per cent lower. -- THOMSON REUTERS