France's biggest listed bank, BNP Paribas froze 1.6 billion euros ($2.2 billion) worth of funds on Thursday, citing the U.S. subprime mortgage sector woes that have rattled financial markets worldwide.

The frozen funds amount to less than 0.5 percent of funds under management for the eurozone's second biggest bank by value, but later in the day a separate European fund valued at 750 million euros was frozen too, and a Dutch bank pulled its planned new listing after suffering subprime losses.

This latest subprime fallout came as Germany's Bundesbank held a meeting of those involved in the rescue of Europe's highest profile subprime victim yet, lender IKB, and as the European Central Bank said it stood ready to act if needed to ensure smooth functioning of markets.

BNP Paribas said it was barring investors from redeeming cash from the funds.

The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating, it said in a statement.

... BNP Paribas Investment Partners has decided to temporarily suspend the calculation of the net asset value as well as subscriptions/redemptions, in strict compliance with regulations, for these funds, it added.

BNP Paribas said the three funds had declined rapidly in size in the past few weeks to 1.593 billion euros ($2.19 billion) at August 7, down from 2.075 billion at July 27. The bank has 326 billion euros of assets under management.

Most of the decline was due to investors pulling out of the funds, said Alain Papiasse, head of asset management and services at BNP Paribas.

There are competitors who have announced they are closing funds but we are not at all in that same pattern, he said, adding the funds mainly held investment grade assets.

BNP Paribas Investment Partners said the funds affected were Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia funds.

Valuation of the funds would resume as soon as liquidity returned to the market and, in the continued absence of liquidity, additional information on the envisaged measures would be given to investors within a month, the firm said.

The ECB said it planned a quick liquidity-providing tender at 4.00 percent to bring some calm to money markets, which a treasurer at a Greek bank said might be related to investment funds needing liquidity to meet redemption requests.

STOCK MARKETS SLIP BUT PLAYERS CALL FOR CALM

Subprime mortgages are the riskiest property loans, often extended to people with payment difficulties or a bad credit history.

Several major U.S. firms have announced losses from exposure to these loans, causing a widespread fall in stock markets.

Traders said that the BNP Paribas statement had helped cause a drop in European stock markets on Thursday.

BNP Paribas shares themselves were down 3.6 percent in early afternoon trade, among the top losers on France's benchmark CAC-40 index.

Euro-zone government bond futures rallied on the news as stock markets slipped. European credit markets gave up their early gains.

With BNP's announcement this morning I think the sector will take a beating again, said Ion-Marc Valahu, head of trading at Amas Bank in Switzerland.

German bank Sal. Oppenheim said it had temporarily closed a 750 million-euro asset-backed securities fund it managed for Austrian investment foundation Hypo KAG, and Dutch merchant bank NIBC cancelled a flotation plan after revealing a 137 million euro loss in losses on U.S. asset backed securities.

However, other major financial services companies said there was no undue cause for concern over current market conditions.

The chief executive of French insurer AXA said on Thursday that there was no systemic crisis at the moment while the finance chief of Germany's Commerzbank said the problems in the U.S. subprime market were not a major issue.

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