LONDON European shares gave back a hefty slice of October's gain and recorded their biggest one day loss in over a month on Tuesday as shock Greek plans for a referendum on its euro zone bailout package sparked heavy selling across all sectors.
The news, announced late Monday, fueled uncertainty about the region's plan to resolve its debt crisis, raising fresh fears of a disorderly Greek default and further contagion to bigger euro zone economies including Italy.
Provoking the ire of euro zone peers, domestic politicians and market participants ahead of a meeting of G20 leaders later in the week, the move dragged stocks right back into the broad trading range established in August and September.
Euro zone banks .SX7E and insurers .SXIE led the retreat, with declines of 8.8 percent and 8.6 percent, respectively, but no sector was immune and the FTSEurofirst 300 .FTEU3 was down 3.4 percent at the close.
"Banks are in for a very tough time for another year and a half, two years, probably, so we remain very underweight banks," said Wayne Bishop, fund manager at King & Shaxson, which manages 145 million pounds ($234 million) in assets out of London.
French banks, due to report earnings over the next two weeks, were among the worst hit, with Societe Generale (SOGN.PA), BNP Paribas (BNPP.PA) and Credit Agricole (CAGR.PA) all posting double-digit declines.
The inauspicious start to November trade came after a bumper October in which the market had rallied 7.9 percent on hopes for a euro zone debt deal, which arrived last week but with much detail -- particularly around funding -- missing.
The Greek referendum "introduces a degree of unpredictability and risk" that was difficult to quantify, said Andreas Utermann, global chief investment officer at RCM, responsible for $154 billion in assets at end-June.
While a 'yes' vote cannot be excluded, "we are braced for very difficult times and the only equity theme that we continue to feel confident about is strong, quality franchises with the prospect of dividends," he said.
Volatility across asset classes would likely increase and the threat of a 'domino effect' on other peripheral euro zone nations was real, Utermann added.
Illustrating that point, Italian and Spanish bond yields rose, their spread to German bunds widened and Italian stocks .FTMIB underperformed the wider market, ending down 6.8 percent as traders factored in increased contagion risk.
Volatility, as measured by the Euro STOXX Volatility index .V2TX, a measure of equity investor "fear," meanwhile, surged 22 percent to record its biggest one-day gain since mid-August, while volumes on core euro zone bourses surged.
Germany's blue-chip DAX .GDAXI ended the day down 5 percent in volume at 148 percent of its 90-day daily average, compared with 128 percent for the FTSEurofirst 300.
A fresh slowdown in global factory output also weighed on equity market sentiment, raising fears of a return to recession in Europe and weighing on cyclicals, even though a smattering of other corporate news provided some relief.
After financials, other cyclical sectors including miners and automakers were among the most heavily sold off on the debt-crisis/growth-fear double-whammy, with the STOXX Europe 600 Autos index down 5.8 percent by the close.
Corporate earnings for investment bank Credit Suisse CSGN.VX and Danske Bank (DANSKE.CO) both lagged forecasts, prompting large cost-cutting plans. They ended down 8.2 percent and 6.8 percent, respectively.
Dutch food and chemicals firm DSM (DSMN.AS), down 1.1 percent, and UK-listed Imperial Tobacco IMT.L, flat, were relative outperformers, meanwhile, on the back of forecast-beating results.
By the close on Monday, of the 276 STOXX Europe 600 firms due to report in the third-quarter earnings season, 43 percent had done so, with 52 percent beating or meeting expectations and the rest missing.
The average miss so far, meanwhile, is 0.3 percent, the data showed, while the average forecast miss for those still to report is 3 percent.
(Graphics by Vincent Flasseur; Editing by Hans-Juergen Peters)