Deutsche Bank, Germany's largest bank, and Axa, Europe's number two insurer, led "nancial shares to their second-biggest drop this year. Natixis, France's fourth-biggest lender, tumbled the most in more than eight years after saying it has about $1.4bn at risk from loans to US sub-prime mortgage lenders.

"The loan situation is a big risk, " said Matthieu Giuliani, a fund manager at Palatine Asset Management in Paris, which oversees $9.2bn in assets. "We're afraid of a chain reaction. If the US consumer coughs, the world economy sneezes. We're cautious on stocks."

Stocks dropped worldwide after a report showed on Tuesday that US mortgage delinquencies rose to a four-year high. The Stoxx 600 is down 6.1% since 27 February, when concern that China's government might tighten control on investment and data indicating slowing growth in the US sparked the biggest weekly drop since March 2003.

The Dow Jones Stoxx 600 Index lost 2.3% last week. The Stoxx 50 tumbled 3%, and the Euro Stoxx 50, a gauge for the 13 nations using the euro, retreated 2.6%.

Stocks recouped some losses after Lehman Brothers Holdings said on Wednesday that bad home loans won't curtail earnings and Bear Stearns said a day later that defaults among the riskiest borrowers won't hurt its business.

National benchmarks fell in all of the 18 western European markets. Germany's DAX sank 2%, France's CAC 40 decreased 2.8% and the UK's FTSE slid 1.8%.

Deutsche Bank lost 4.9%. Axa retreated 6.8%.

Natixis dropped 9%.

Barclays, the UK's third-biggest bank, tumbled 7%.

Insurance stocks declined the most among the 18 industry groups in the Stoxx 600, followed by banks and "nancial services companies.

US sub-prime lender New Century Financial said on Monday it doesn't have the cash to pay creditors. Sub-prime loans cater to people with the poorest credit records.

Accredited Home Lenders Holding on Friday said it agreed to sell $2.7bn of loans to pay bankers who demanded cash to cover the risk of defaults.

"There are issues to be concerned about, " said Piers Hillier, head of European equities at WestLB Mellon Asset Management UK in London, which manages $35bn. "This may be the tip of the iceberg.

That's why "nancial stocks were hit hard."

"There's a contagious effect, " said Samir Essafri, a fund manager at Richelieu Finance in Paris, which oversees about $5bn. "There's panic about the real estate industry and all of the stocks are being swept up."

So far this year, mergers and acquisitions in Europe have totalled $290bn, according to data compiled by Bloomberg.

Deals reached a record $1.4 trillion in 2006, as companies used cash and relatively low interest rates to take over rivals.

Altadis rallied 15%. Imperial Tobacco Group on Thursday made an unsolicited Euro11.5bn bid for Altadis, the Spanish maker of Gauloises cigarettes, in what would be the industry's biggest European takeover. The Altadis board is due to meet to discuss the offer.

Imperial, the maker of Davidoff cigarettes, rose to a record on Friday on speculation that Altria Group may bid for the company to pre-empt Imperial's own attempt to purchase Altadis.

The stock climbed 11% last week.

Bloomberg