European shares tumbled to their lowest close in more than two weeks overnight amid renewed recession and eurozone debt worries and threats to the banking sector.

Britain's FTSE 100 ended the day 3.6 per cent lower, while Germany's DAX fell 5.3 per cent and France's CAC40 dropped 4.7 per cent.

A US lawsuit over packaging of toxic mortgage debt added to the markets' woes.

A US regulator is suing 17 large banks and financial institutions over losses on about $200 billion of subprime bonds.

The STOXX Europe 600 Banks index fell 5.9 per cent and hit a 29-month low.

It has lost more than one-third of its value in 2011, and is the worst performing European sector.

Deutsche Bank fell 8.9 per cent, extending a decline from Friday, when news of the lawsuit first hit shares in the sector.

On Monday, a UK press report said Britain's Serious Fraud Office was probing some of the German bank's deals in asset-backed securities.

Other banks to fall included Royal Bank of Scotland, down 12.3 per cent.

The economically sensitive car-making sector, down 5.8 per cent, was among the biggest fallers. German carmakers to fall included BMW, down 6.2 per cent.

Eurozone fears

Sorry, this video has expired European Commission president Jose Manuel Barroso discusses the Eurozone's economic challenges

Worries about public deficits in Greece and Italy and a regional election rout for Germany's ruling party cast fresh doubt on the eurozone's ability to tackle its debt crisis.

The eurozone faces a week packed with political and legal risks, beginning with a German constitutional court ruling on Wednesday on claims that Berlin is breaking German law and European treaties by contributing to bailouts for Greece, Ireland and Portugal.

The court is not expected to rule against the contributions, but may add stipulations for dealing with future requests that will complicate the region's bailout plans.

Besides the German court ruling, a meeting of finance ministers of Germany, the Netherlands and Finland will be closely eyed as they discuss the nagging issue of collateral for loans to Greece.

Wall Street was closed for a holiday Monday but it was unlikely that US investors would have been in any more of a positive mood given data ahead of the long weekend that showed US employment growth halted in August.

The data fuelled concerns that the world's biggest economy is slipping back into recession.

Reuters