European stocks plunge as bank troubles deepen

* FTSEurofirst 300 drops more than 5 percent

* Banks worst hit as financial market crisis deepens

* Commodities stocks slip on lower oil, metals prices

By Atul Prakash

LONDON, Oct 6 (Reuters) - European shares were still sharply down by midday on Monday as the financial sector crisis deepened, forcing governments to rescue large banks and protect ordinary depositors.

Investors ignored a $700 billion package to rescue the U.S. financial sector, passed by the U.S. House of Representatives on its second try on Friday and signed into law by President George Bush.

At 1037 GMT the FTSEurofirst 300 .FTEU3 index of leading European shares was down 5.3 percent at 1,031.85 points, with just two gainers among its 312 stocks. The benchmark is down more than 30 percent so far this year.

Banks took the most points off the index, with Dexia (DEXI.BR) slipping 20 percent, Credit Agricole (CAGR.PA) falling 10.4 percent, BNP Paribas (BNPP.PA) down 4.5 percent and Societe Generale (SOGN.PA) shedding 8.8 percent.

Commerzbank (CBKG.DE) tumbled 13 percent. HBOS HBOS.L, due to be taken over by Lloyds TSB (LLOY.L), was down 15 percent, while Lloyds itself was down 9 percent.

"This is a stampede," said Valerie Plagnol, chief strategist at CM-CIC Securities, in Paris. "We have never seen, in history, public intervention taking place in such a massive way in such a short timespan."

"The issue right now is to unclog the money market. As long as the money market is not functioning properly we are stuck in this situation."

The cost of borrowing overnight funds on international money markets remained close to central banks' targets, thanks to continued liquidity injections but lending was virtually non-existent across all maturities.

Three more European governments offered bank deposit guarantees, as regulators from Washington to Seoul scrambled to contain the deepest financial crisis in 80 years.

Germany said it was considering a nationwide "umbrella" to shield its banking sector from market turmoil, a reversal in policy which underscored growing government concerns about financial contagion.

Germany had pledged on Sunday to guarantee private deposit accounts, as it clinched a deal to rescue Hypo Real Estate HRXG.DE. That was followed by similar moves by Austria and Denmark, after Ireland issued the first, albeit broader guarantee last week.

But mortgage lender Hypo Real's shares were down 26 percent after slumping as much as 48 percent in early trade.

"European governments are looking to stabilise the financial sector by attempting to rescue some major institutions. Whilst their actions are understandable, the smell of desperation remains strong," said Chris Hossain, senior sales manager at ODL Securities.

BIGGEST CROSS-BORDER RESCUE

In one of the biggest cross-border rescues since the full force of the credit crisis swept across the Atlantic into Europe last month, BNP Paribas (BNPP.PA) scooped up Fortis's FOR.BR assets in Belgium and Luxembourg to become the euro zone's biggest deposit bank. Trading in Fortis shares was suspended.

UniCredit (CRDI.MI), Italy's second-biggest bank, also announced plans to raise new capital. Its stock fell 4 percent.

Across Europe, Germany's DAX index .GDAXI fell 4 percent, the UK's FTSE 100 index .FTSE slipped 4.1 percent and France's CAC 40 .FCHI shed 4.8 percent.

Oils were another notable casualty, with crude prices CLc1 falling more than 4 percent to below $90 a barrel, on worries of weaker demand. Total (TOTF.PA), ENI (ENI.MI), BP (BP.L), and Royal Dutch Shell (RDSa.L) all fell between 5.2 and 6.9 percent.

Weaker metals prices hurt mining shares. UBS and Merrill Lynch issued downbeat notes on the sector, cutting their forecasts for metals prices, and lowering share price targets.

Eurasian Natural Resources Corp. (ENRC.L) fell 15.3 percent. Anglo American (AAL.L), Antofagasta (ANTO.L), Kazakhmys (KAZ.L), Rio Tinto (RIO.L), Vedanta Resources (VED.L), Xstrata (XTA.L) fell between 8.6 and 18 percent.

BHP Billiton's (BLT.L) shares fell 8.3 percent. A senior Chinese government official urged European regulators to reject its $89 billion bid for Rio Tinto, saying it would be harmful to the global economy, the Sydney Morning Herald paper said. (Editing by Greg Mahlich)