Bank stocks drop on fears of European contagion

(Reuters) - Large U.S. bank stocks fell sharply on Monday on concerns that lenders like Citigroup Inc <C.N> and Morgan Stanley <MS.N> may face more earnings setbacks from the debt crisis in Europe.

Citigroup was the hardest hit among the biggest U.S. banks, dropping 9.8 percent to close at $23.11, up slightly from an intraday low of $23.05.

Bank of America Corp <BAC.N> and Morgan Stanley also fell harder than broader financial indexes, with the two stocks closing down 9.6 percent and 7.6 percent, respectively.

The KBW Bank Index, which includes Citi and Bank of America, fell 4.8 percent, while the NYSE Arca Securities Broker/Dealer Index, which includes Morgan Stanley, fell 5 percent.

Analysts and investors said the sharp sell-off in financial stocks in recent weeks has been reminiscent of the financial crisis. Bank of America and Citi hit intraday lows not seen since the market bottomed in March 2009, while Morgan Stanley hadn't traded at its intraday low since December 2008.

"I remember in '08, when all hell was breaking loose, these were the levels where you thought there was going to be no bank tomorrow," said Jamie Lissette, founder of The Hammerstone Group, a Westport, Connecticut-based firm that operates discussion forums for investors.

Investors are now worried that U.S. banks will suffer in the fallout from a European sovereign debt default, or that the European debt crisis will stifle U.S. economic growth.

On Monday, Greece said it will miss deficit targets for the year, fueling concerns about a possible default. Shares of Franco-Belgian financial group Dexia dropped 10 percent on concerns about its Greek exposure and a Moody's warning about its liquidity position.

Nancy Bush, a veteran bank-stock analyst and contributing editor at SNL Financial, described the sell-off as a "panic." She predicted that the volatility of recent months will continue.

"You get great relief rallies when it looks like things are getting resolved in Europe," she said. "Then it just sinks back into the mire. It'll just keep going up and down until there is a sense that things have finally stabilized."

In a sign of support, Japanese lender Mitsubishi UFJ Financial Group Inc <8306.T>, which has a large stock investment and joint venture with Morgan Stanley, released a statement reiterating a commitment to its U.S. partner.

"In response to recent market volatility MUFG wishes to reiterate that we are firmly committed to our long-term strategic alliance with Morgan Stanley," the bank said.

(Reporting by Lauren Tara LaCapra in New York and Joe Rauch and Rick Rothaker in Charlotte, North Carolina; Editing by Gary Hill)