REUTERS

European shares suffered their biggest one-day loss in a month after Greece's prime minister unexpectedly called a referendum on the latest bailout deal, raising anxiety over the euro zone debt crisis.

Greek, Italian and French lenders, which have big exposure to euro zone peripheral debt, dragged the European banking sector 6.4 percent lower, with Bank of Piraeus down 12.4 percent, Societe Generale losing 14.6 percent and Intesa Sanpaolo , down 13.3 percent.

“Fear and fright are back on the markets. At the very end of a 'golden October' with an impressive rebound in most stock markets, the stock exchange turned into a haunted house,” said Roger Peeters, strategist at Close Brothers Seydler.

The FTSEurofirst 300 index of top European shares was down 3.8 percent at 958.71 points at 14:00 SA time. The index fell below the 961.45 support level, a 38.2 percent retracement of the rally from Sept. 22 to Oct. 28.

Around Europe, Britain's FTSE 100 index was down 3.1 percent, Germany's DAX index down 5.2 percent, France's CAC 40 down 4.2 percent and Italy's FTSE MIB down 6.2 percent.

Trading volumes were between 50 and 70 percent of 90-day averages around midday.

“The ultimate consequence for banks and investors is that they will have to take additional writedowns on their Greece positions. Also, there is an additional burden on the financial stability and contagion effects to other weak countries in the euro zone are likely,” said Guenther Welter, fund manager at Union-Investment.

The cost of insuring debt issued by euro zone states rose on the Greek referendum news. Italian five-year credit default swaps rose 40 basis points on the day to 483 bps, meaning an investor has to pay 483,000 euros to insure 10 million euro of Italian debt. French CDS rose 18 bps to 193 bps, while German CDS rose 10 bps to 94 bps.

“A fully fledged (Greek) bankruptcy is cooking with far reaching consequences for the banking sector,” said Heino Ruland at Ruland Research.

“We remain short banks and insurance companies, but believe that such a final blow to the Euro Area is desperately needed to discipline the likes of (Italian prime minister) Berlusconi. Otherwise we will be facing the end of the common currency with enormous negative consequences.”

The Euro STOXX 50 volatility index , Europe's main barometer of anxiety known as VSTOXX index, was up 17 percent and above 40, signalling a sharp rise in risk aversion. - Reuters