Leading bankers dismissed revived market jitters about the financial industry and played down concerns that patchy economic recovery and tough new capital rules could plunge the sector into more turmoil.   

European bank shares halted losses from Tuesday, when a newspaper article highlighting loopholes in industry-wide stress tests stoked fears about banks' sovereign debt exposure.   

Market worries over what impact the proposed Basel III capital regulations would have on bank profits and dividends also weighed on the sector, whose stumble into crisis dragged the global economy into its worst recession since the 1930s.

Axel Weber, a member of the European Central Bank's governing council and head of Germany's Bundesbank central bank, kicked off the Banks in Transition conference by ruling out the possibility that any debt-strapped state in the euro zone would default.

"The sum of measures initiated by governments, in cooperation with the IMF (International Monetary Fund), should be enough to end discussions of a potential state insolvency in the markets," Weber said. "I do not share fears of a double recession or deflation."    

But a Portuguese bond auction showed investors remained sensitive to sovereign debt risks as they demanded an average yield of close to 6 percent to hold 2021 treasury bonds.

The Portuguese 10-year debt yield spread against benchmark German bunds hit its widest since May, while the 10-year Irish spread hit a new euro lifetime high on Tuesday.   

To help calm nerves, Ireland on Tuesday extended guarantees for short-term bank liabilities as expected. In Greece, whose financial woes triggered a crisis of confidence in the euro, National Bank said it would raise 2.8 billion euros via a rights issue, a convertible bond and asset sales to deal with the debt crisis.

"I think we can still see some skeletons in the closet in the European banking sector," said David Cohen, an economist at Action Economics in Singapore.   

But Severin Cabannes, deputy chief executive of France's Societe Generale, said tensions in Ireland did not presage bigger trouble ahead. "We don't consider the scenario of a banking crisis today.

Governments and regulators are managing the situation even if it is still difficult in some cases," he said.

He said markets had priced in the impact of new capital rules and he was not worried about slipping back into recession.   

"Our central scenario is that there will not be a double-dip scenario in the US economy, but a slow recovery."            

European regulators conducted stress tests of 91 banks that were designed to restore confidence in the region's banking sector but many investors remain sceptical of the tests' credibility and banks are loath to repeat the exercise. - Reuters