European shares extended losses on Monday, weighed by concern major economies could be heading for a return to recession, and with banks among the biggest fallers as some faced a US lawsuit over toxic mortgage debt.

At 1355 GMT, the FTSEurofirst 300 index of top European shares was down 4.3 per cent at 908.00 points.

The STOXX Europe 600 Banking Index , meanwhile, was down 6.3 percent.

European stocks plunged by about 5 per cent in mid afternoon trading hit by acute tension over the risk of
recession in leading economies and over eurozone debt, said experts.

Bonds issued by Greece and Italy fell, and the cost of insuring against default by Italy and France, as indicated by the market for credit default swap (CDS) instruments, rose sharply.

German stocks were down by nearly 6 per cent, while in London, the FTSE index fell by 3.06 per cent to 5,129.97 points.

The euro fell below 1.41 dollars. The price of gold jumped back above $1,900 an ounce on demand for a safe haven investment.

The head of the European Central Bank Jean-Claude Trichet warned of an immediate and imperative need for enactment of a second debt rescue for Greece, and for tightened discipline in the management of eurozone economies.

He also spoke of an eventual "confederal" disciplined management of eurozone national finances.

And the head of the International Monetary Fund Christine Lagarde repeated her warning that banks in Europe need extra capital to withstand any contagion from the eurozone debt crisis.

The move against stocks was exacerbated by a decision by US authorities to take legal action against 17 leading international banks over trading in securitised mortgage trading at the heart of the 2008 financial crisis, traders
said.

Bank shares fell heavily in Europe. The Frankfurt stock market was showing a fall of 5.55 per cent from the
closing level on Friday to 5,230.84 points on the DAX index with Deutsche Bank shares down 9.59 per cent.

In Paris the CAC 40 index was down 5.10 percent to 2,987.96 points and in Milan, the FTSE Mib index was showing a fall of 5.30 percent to 14,263 points.

Asian stocks too fell sharply, with the Tokyo market shedding 1.86 percent. The US legal moves are aimed at recouping billions of dollars lost in the financial crisis.

ECB data showed that eurozone banks have deposited record amounts of overnight funds with it, a signal of reluctance by banks to lend to each other.

"The banking sector continues to remain under pressure today as it underperforms across Europe," said Manoj Ladwa, senior trader at ETX Capital.

"The chances of a near-term recovery remain slim as eurozone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector," he added.

"The US decided to drop a bombshell on the banking sector ahead of their extended weekend by announcing a $200-billion (141-billion-euro) lawsuit across the whole industry for the miss selling of mortgage backed assets, the dreaded subprime loans," said Simon Denham, head of London-based trading group Capital
Spreads.

US firms targeted in the suits included Bank of America, Goldman Sachs, Citigroup, JPMorgan Chase, Morgan Stanley, General Electric, Ally Financial and First Horizon.

The foreign banks were Deutsche Bank, HSBC, Credit Suisse, Barclays, Nomura, Royal Bank of Scotland and Societe Generale. Traders also continued to digest weak US data from late last week.

The jobs data for August were the worst since September 2010, when the economy shed more than twice the number of jobs it created. The pace of job growth remains far below the numbers needed to reduce the high unemployment rate.