LONDON (REUTERS) - Euro zone stocks suffered their biggest one-day fall since 2011 on Monday, with southern European banks in particular getting pummelled after Greece shut its banks and imposed capital controls.
Some 30 billion euros (S$45 billion) in market capitalisation was wiped off euro zone banks as investors dumped financial stocks, fearing the ripple effects of a potential Greek exit from the euro zone.
The selling did not hit panic levels, however, with European equities still up some 10 per cent year-to-date and not far off seven-year highs.
Some investors said they had started to look for buying opportunities in the belief that the European Central Bank would act to fend off any prolonged financial turmoil. Others said they were still betting that a "Grexit" would be avoided.
"The reaction of financial markets today was negative but there is no sense of panic," said Valentijn van Nieuwenhuijzen, a strategist at NN Investment Partners.
"This signals that investors believe a workable solution can still be found and a Grexit avoided but also that the fundamental and policy environment are strong enough to deal with the current situation in Greece.
The blue-chip Euro STOXX 50 index closed down 4.2 per cent to 3,468.90 points, its worst day in four years.
Benchmark indexes in Portugal and Italy slid 5 per cent. European stock-market volatility surged to a fresh six-month high. The turmoil saw several German companies rethink plans for stock-market listings.
With the Athens stock exchange closed, US-listed Greek assets absorbed much of the blow. One Greek bank's US shares slumped some 30 per cent; a Greece ETF was down 16 per cent.
Greece is a small part of the European economy, but concern was growing on Monday that its problems would spread to peripheral euro economies like Portugal and Spain.
"There are real, genuine concerns about the spread of contagion," said Chris Parkinson, head of research at Christopher Street Capital.
But, he said, "this doesn't fundamentally change the risk profiles of euro zone banks for the moment. I would imagine the ECB will step in pretty soon with calming words, which could help".
Eight of the 10 worst-performing stocks on the STOXX Europe 600 index were banks. Banco Comercial Portugues , Italy's Monte dei Paschi di Siena and Austria's Raiffeisen Bank fell 7 to 11 per cent.
Travel operator TUI closed down 7 per cent, weighed down not just by Greece but also an terrorist massacre in Tunisia on Friday that killed 39 foreign tourists.
More sanguine investors said the broader improving economic backdrop and support from the ECB offset the Greek turbulence. "We think that the current crisis - whatever the outcome - will probably not damage the longer-term prospects for European equities," Barclays strategists wrote in a note to clients.
Goldman Sachs wrote in a note that its base case remained that Greece would stay in the euro zone, even as the risks of its departure were rising.
"Investors who were heavily exposed to Greece have cut their exposure hugely ... But a drop of 10 per cent for European stocks is entirely possible (in the event of Greece leaving the euro zone)," said Peter Dixon, equity strategist at Commerzbank. "That's the price to pay for the markets, which have over the course of the last couple of years really not taken into account these risks."