* FTSEurofirst 300 index down 2.8 percent
* Banks, commods knocked by euro zone debt concerns
* Korea geopolitical tension nervousness
* For up-to-the minute market news, click on []
By Joanne Frearson
LONDON, May 25 (Reuters) - European shares fell sharply on
Tuesday to their lowest in nearly nine months, with banking and
commodity shares hammered on fears the euro zone debt crisis
could be spreading and global growth could slow.
Nervousness in the market was exacerbated by heightened
geopolitical tensions in Korea after the North Korean leader Kim
Jong-il ordered his military to be on a combat footing.
By 0903 GMT, the pan-European FTSEurofirst 300 <>
index was down 2.8 percent at 946.18 points after hitting a low
of 944.06 earlier, its lowest since early September 2009.
The index has lost 14.4 percent since fears over the euro
zone's sovereign debt problems and new fiscal austerity measures
escalated in mid-April.
The yield on 10-year German government bonds sank to a
record low while Bund futures extended gains to reach a record
high, as risk averse investors sought safe asset classes.
Meanwhile, 10-year U.S. Treasury yields fell to a one-year
low of 3.082 percent <US10YT=RR>.
"Bunds are gaining as equities, particularly banking stocks,
come in for a hammering," said a trader in London.
Banks were the worst performers, with the STOXX Europe 600
Banking index <.SX7P> falling 3.6 percent.
Banco Santander <SAN.MC> and BBVA <BBVA.MC>, hit by
Saturday's bailout of small savings bank CajaSur by the Bank of
Spain in the previous session, continued their falls and lost
4.4 percent and 4.8 percent respectively.
Among other banks, Barclays <BARC.L>, HSBC <HSBA.L> and
UniCredit <CRDI.MI> dropped 2 to 5 percent.
The banking index has lost 16 percent so far this year, the
worst performing sector in Europe in 2010. Despite last year's
sharp recovery, the sector is still down 66 percent from its
peak of April 2007 before the financial crisis started to weigh
on the market.
"The markets are sensitive to the slightest catalyst
(CajaSur). Maybe it is an indication of the extent of the
problems out there," said Mike Lenhoff, chief strategist at
Brewin Dolphin.
"Maybe the government is going to have to involve itself in
more bailouts and the thinking is this debt crisis does not have
an immediate resolution."
Meanwhile, the U.S. two-year swap spreads pushed out to
their widest levels in 13 months, with traders expecting
benchmark dollar LIBOR to keep ratcheting higher as the euro
zone debt crisis makes bank wary of lending to European
institutions.
"There is a fear that there are more worrying banking cases
out there. Libor has been rising significantly telling us some
banks could be in trouble," said Justin Urquhart Stewart,
director at Seven Investment Management.
ENERGY STOCKS WEIGH
Energy stocks were also hard hit by the concerns in the euro
zone, with crude <CLc1> extending its drop to under $68 a
barrel. BP <BP.L>, BG Group <BG.L>, Royal Dutch Shell <RDSa.L>
and Total <TOTF.PA> fell 2.5 to 3.8 percent.
The six-week strong sell-off in shares triggered by the euro
zone debt crisis has pulled European stock valuations to their
lowest level in 10 months.
Shares in the STOXX Europe 600 <> benchmark index
currently trade at 12.37 times reported earnings, a level not
seen since July 2009. This compares with an average
price-to-earnings (P/E) ratio of 15.74 for U.S. S&P 500 <.SPX>.
Across Europe, the FTSE 100 <> index was down 2.3
percent, Germany's DAX <> fell 2.5 percent and France's
CAC 40 <> was 2.8 percent lower.
Spain's IBEX <> lost 3.5 percent, Portugal's PSI 20
<> fell 2.5 percent and Italy's benchmark <.FTMIB> was
down 3.4 percent.
(Additional reporting by Blaise Robinson; Editing by Mike
Nesbit)
