European stocks fell for the second successive day on Friday as fears over financial stocks' exposure to credit market losses continued to batter the beleaguered banking sector.
The FTSE 100 Index dropped 0.8 percent to 6,530.60, while France's CAC-40 Index lost 0.2 percent to 5,720.42.
Germany's DAX Index fell 0.4 percent to 7,849.49.
"Banks' earnings are likely to be revised down in our view, as they do not yet fully reflect the severity of the US housing downturn and its impact on credit, money markets and ultimately bank balance sheets," Goldman Sachs equity strategists said in a note.
The banks' declines weighed heavily across Europe, adding to Thursday's heavy losses in the sector.
UK bank Barclays was particularly hard hit on speculation that it had had to approach the Bank of England for emergency funding and concerns over its profit outlook.
The shares ended 6 percent lower, despite the Bank of England's indication there had been no use of its standing loan facility, which allows banks to borrow overnight at a penalty rate.
Analysts were also dismissive, citing its recent strong trading statement and the fact it bought back 5.75 million shares on Thursday.
The sector's woes worsened as a report in the Wall Street Journal indicated that regulators were looking into allegations that US powerhouse Merrill Lynch had been dealing with hedge funds to delay when it had to record losses on mortgage-backed securities. Deutsche Bank also downgraded the stock to hold from buy.
"Financial stocks remained under great pressure. The banks still have major balance sheet problems and I think we will continue to have big negative news on that front," said Jean-Francois Virolle, chief strategist at Global Equities in Paris.
Royal Bank of Scotland was off 4.7 percent, while HSBC fell 2.1 percent. French bank BNP Paribas lost 2.4 percent, Deutsche Bank dropped 2.1 percent and ING lost 1.6 percent.
First-half profits from British Airways added to the negative mood. Its shares fell 2.7 percent after it trimmed its guidance for full-year sales growth to 3 percent to 3.5 percent from its earlier 4 percent.
Pay television broadcaster British Sky Broadcasting Group fell 4.5 percent, despite a 83,000 rise in net new pay television customers, as the company said first-quarter net profit fell 28 percent on higher costs.
France's Suez gained 1.3 percent and the UK's Tullow Oil added 3 percent.