European shares hit lowest close in 3-1/2 years

"The implications of a fallout from (the credit crunch) are far-reaching, there are dozens of quoted banks in Europe, so it would seem unlikely that they would all be unaffected by this," said Darren Winder, head of macro and strategy research at Cazenove. "There is a contagious effect."

EYES ON BAILOUT PLAN

Investors were cautious as U.S. lawmakers met to vote on a $700 billion government fund to buy bad debt, worrying that this may not be enough to help stabilise the economy. [ID:nSP372803]

"It is clearly going to improve the flow of credit for the economy but it remains to be seen whether it is large enough," said Cazenove's Winder.

Across Europe the FTSE 100 index was down 5.30 percent, Germany's DAX was 4.23 percent lower and France's CAC 40 was down 5.04 percent.

Also weighing on the benchmark index were commodity stocks, dragged down by weaker industrial metals prices, with copper MCU3=LX tumbling to its lowest level in nine months.

Anglo American (AAL.L), Antofagasta (ANTO.L), BHP Billiton (BLT.L), Kazakhmys (KAZ.L), Xstrata (XTA.L) were down between 8.3 and 17.5 percent.

"Lower commodity price expectations drive lower earnings expectations," Deutsche Bank said in a research note.

"There are a few more unsettling weeks to come including: broker downgrades, resolution of government intervention, and weaker Chinese data," Deutsche Bank said, adding it would be difficult for the mining sector to outperform in the near term.

Meanwhile oil extended its decline, with crude CLc1 falling nearly 7.6 percent to $98.76 a barrel, pressured by gains in the U.S dollar.

BP (BP.L), Royal Dutch Shell, (RDSa.L) and Total (TOTF.PA) fell between 4.2 and 4.6 percent. (Additional reporting by Brian Gorman, Tyler Sitte, Sitaraman Shankar and Peter Starck; Editing by Erica Billingham)