European banking stocks extended losses Thursday after the U.S. market opened sharply lower and concerns grew over the investigation by federal regulators into whether European banks have sufficient funding to operate on a day-to-day basis in the U.S.

Losses in the sector were spread across Europe, with Barclays PLC (BCS) closing down 11%, Societe Generale SA (GLE.FR) down 12% in Paris and Germany's Commerzbank AG (CBK.XE) off 10%. Dexia SA (DEXB.BT) led the slump in Belgian financials, closing down 14%. Each of the banks was the leading loser on its country's key stock index.

The Stoxx 600 European banking index lost 6.7%, as no country was spared the damage.

"Banking stocks have been decimated across Europe, with indiscriminate selling even in banks that maintain their exposure to the crisis is slim," said Will Hedden, sales trader at IG Markets. "No sector is surviving this tidal wave of selling, and the fact that financials are first in the firing line will only lend support to the anti-short-selling-ban camp."

The day's sell-off was triggered after Morgan Stanley (MS) cut its GDP growth forecasts for the euro area. The revival of a proposal to impose a tax on European financial transactions at a recent meeting between German and French leaders also weighed banking stocks, said Arun Melmane, an analyst at Investec Securities.

"There's not been any good newsflow in this sector for a while," Melmane added.

Stocks fell further on a front-page story in the Wall Street Journal that the Federal Reserve Bank of New York, which oversees the U.S. arms of many large European banks, had recently been demanding more information about the banks' access to funding.

The report came a day after data from the European Central Bank showed an unnamed bank had borrowed $500 million. "This is feeding new fears," said an analyst in Paris.

Earlier Thursday, Morgan Stanley warned that it sees "material risk of outright recession," and cut its 2011 euro area GDP growth forecast to 1.7% from 2.0%, and its 2012 forecast to 0.5%, from 1.2%. Goldman Sachs, meanwhile, cuts the 2012 Global GDP growth forecast To 4.4% From 4.6%.

Morgan Stanley cited a number of new factors that are likely to weigh on growth in the second half the year, such as slower global trade growth, tougher term funding markets for banks and additional austerity measures announced in several countries.

For nearly two years, many investors and analysts have been arguing that the European banking sector is undercapitalized and overexposed to potentially risky debts of cash-strapped countries like Greece, Portugal, Ireland, Spain and Italy.

-By Michael Haddon and Marietta Cauchi, Dow Jones Newswires; 4420-7842-9289; michael.haddon@dowjones.com

(Michelle Maatoukk, Noemie Bisserbe and Simon Kennedy contributed to this article.)

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