The stock market losses spilled into currencies as the dollar and sterling weakened broadly on renewed concerns about the global financial system as the credit squeeze that started in August last year continues.
Safe-haven European government bonds jumped more than a third of a point on talk of more stress in the banking sector.
British mortgage lender HBOS fell as much 17 percent before recovering some losses, while Societe Generale lost nearly 7 percent after BNP Paribas said it would not bid for the French bank.
Royal Bank of Scotland lost 3.2 percent and Barclays fell 2.1 percent.
Stock markets in Asia had picked up the baton from Wall Street's searing rally after the U.S. Federal Reserve's 75 basis point cut to 2.25 percent proved just the tonic they wanted.
But the post-Fed cheer didn't last long in Europe as worries about the impact of the credit crunch grabbed attention.
"Keep in mind that the effectiveness of rate cuts by the Fed currently is reduced because the monetary transmission mechanism is not functioning as normal," said Arthur van Slooten, a strategist at Societe Generale in Paris.
"So it's not a rate cut in itself, that is not the main thing that will get us out of this liquidity crisis."
The FTSEurofirst 300 index of top European shares was down 0.2 percent at 1,234.05 points, having risen earlier by as much as 1.1 percent after the Fed rate cut and results from Goldman Sachs and Lehman Brothers had topped earnings forecasts.
The Fed's cut in borrowing costs to 2.25 percent was less than expected as markets had been pricing in a 100 basis point move, bearing in mind deteriorating global credit market conditions and worries for the U.S. financial sector.
But U.S. stocks posted their biggest one-day gain in more than five years, while Japan's Nikkei rose 2.5 percent and European stocks jumped 0.7 percent in early trade.
Whippy trade in the dollar finally gave way to losses as the Fed was brushed aside on renewed banking concerns.
The dollar and sterling weakened broadly, while the yen sharply extended gains.
The dollar extended losses against the yen, trading down more than 2 percent to a low of 97.68 yen, and was more than 1 percent down against the Swiss franc at 99 francs.
The euro jumped nearly 1 percent against sterling to 78.71 pence and the pound erased all its gains against the dollar to trade as low as $2.0047.
"Shares have slid, some rumors are going around. Euro/sterling fell by about 50-60 ticks, so there is a lot of weakness in sterling. Investors ... have gone back into risk averse mode and the dollar's been sold off," said a trader in London.
"The market is very, very nervous," he said.