By Barbara Kollmeyer and Toby Anderson

European stocks plunged Monday and the euro tumbled, as investors piled into safe-haven assets amid rising fears over Europe's sovereign debt crisis and economic growth on both sides of the Atlantic.

The Stoxx Europe 600 index slumped 4.1% to close at 223.45 on Monday, a day when U.S. markets were shuttered for the Labor Day holiday.

The yield on the benchmark 10-year German government bond plunged to well below 2%, a new record, while Italian yields rose on fears the government's commitment to austerity and reform is weakening.

Europe's beleaguered banking sector was battered over concerns about growth as well as lawsuits filed against 17 lenders Friday by the top U.S. federal housing regulator, saying they sold $196 billion of risky home loans over four years to Fannie Mae and Freddie Mac without adequately disclosing the risks.

Further evidence of the weakness of the European economy came in weak purchasing managers index data from France, Germany and the euro zone as whole.

"The banking sector continues to [be] under pressure," said Manoj Ladwa, senior trader at ETX Capital, in emailed comments. "The chances of a near-term recovery remain slim as euro-zone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector."

Shares of Royal Bank of Scotland Group (RBS, RBS.LN), one of the banks named in the U.S. lawsuit, plunged 12%, while Deutsche Bank (DB, DBK.XE), another one of the banks, tumbled 8.9%. Among others, Societe Generale (GLE.FR, SCGLY) skidded 8.6%, Barclays (BCS, BARC.LN) slumped 6.7%, and HSBC Holdings (HBC, HSBA.LN) declined 3.8%.

Political and economic issues also weighed in Italy, where the government has been coming under increasing pressure to step up approval of its austerity package, which some say is being watered down. Investors have become increasingly concerned about the finances of the country, one of the biggest economies in the 17-member euro zone. Italy's FTSE MIB index sank 4.8% to 14333.91, with shares of Intesa Sanpaolo (ISP.MI, ISNPY) dropping 7%.

That focus on Italy comes after negotiations between Greece and international lenders stalled on Friday amid disagreement over the nation's progress on reducing its budget deficit. Greece's top central banker called on the government to speed up efforts to close the budget gap amid growing concerns elsewhere in Europe that Athens can't pull itself out of its debt spiral. The Athens General Index on Monday fell 3.1% to 863.90, aided by a 9.9% slide in EFG Eurobank Ergasias (EUROB.AT, EGFEY).

In Germany, Chancellor Angela Merkel's Christian Democratic Union was trounced Sunday in state elections in Mecklenburg-Vorpommern, the latest in a string of election defeats. Some analysts believe the results are a sign of voters venting their frustration at how the government has handled the European debt crisis.

Economic news wasn't much better. Private-sector activity across the euro zone grew at the slowest rate in two years in August; the Markit composite purchasing managers index dropped to 50.7 from 51.1 in July and is the latest in a string of data that suggest the region's economy is faltering. That follows Friday's dismal U.S. jobs report, which showed a net zero jobs were created in August.

The day's biggest decliner among Stoxx 600 components was Swiss specialty-chemical group Clariant (CLN.VX, CLZNY), which plummeted 16% after it cut its full-year sales and profit outlook because of the strong Swiss franc and the global economic slowdown.

Other chemical stocks followed Clariant lower, including BASF (BAS.XE, BASFY), down 5.6%, and Bayer (BAYN.XE, BAYRY), down 4.6%, both in Frankfurt. Overall, the German DAX 30 index sank 5.3% to 5246.18.

The French CAC 40 index finished 4.7% lower at 2999.54. BNP Paribas (BNP.FR, BNPQY) slumped 6.3% and Credit Agricole (ACA.FR, CRARY) slid 5.5%.

The Spanish IBEX 35 index dropped 4.7% to 8066.50, as Banco Santander (STD, SAN.MC) stumbled 5.9%.

Banks and resource stocks fell on concerns about global growth, driving the FTSE 100 down 3.6% to 5102.58. Royal Dutch Shell (RDSA, RDSB, RDSA.LN, RDSB.LN) skidded 4.3% and miner Rio Tinto (RIO, RIO.LN) slumped 5%.

In the currency markets traders took their cues accordingly. The euro dropped to its lowest level against the dollar since Aug. 12 at $1.4094, from $1.4206 late Friday in New York, and drove investors to the safety of the Swiss franc, which extended gains made against the single currency last week. The euro was fetching CHF1.1066, from CHF1.1203 late Friday in New York. The dollar was at CHF0.7853, compared with CHF0.7886, and at Y76.86 against the yen, from Y76.82.