Leading European bank stocks tumbled on Friday as worries mounted that the U.S. subprime crisis has taken a sharp turn for the worse and will force another round of hefty writedowns of bank exposures.

Banks worldwide have taken charges totalling billions of dollars on holdings in mortgage-backed securities, which have been hit by a rising tide of defaults in U.S. subprime mortgages

-- loans extended to borrowers with patchy credit histories. -- loans extended to borrowers with patchy credit histories.

Now investors wonder whether a string of bad third-quarter results -- with some banks such as U.S. investment bank Merrill Lynch and Switzerland's UBS reporting their first losses in years -- is the end of the story.

People think it's a third-quarter knock and that life will then go back to normal, said David Bowers at Absolute Strategy in London. Our view is the market is beginning to realise a transition may be underway with fundamental implications for the financials' (banks) business model, he added.

The latest bout of investor anxiety was triggered on Thursday, when Citigroup shares dived nearly 7 percent after two brokerages lowered their investment ratings amid fears it might have to cuts its dividend. Citi has big subprime-related exposures.

A related concern for the sector is that debt securitisation

-- the packaging by banks of mortgage-backed assets into -- the packaging by banks of mortgage-backed assets into securities which are then parcelled out to investors -- as a growth business is in serious doubt as an era of cheap credit draws to a close.

People are realising the story has legs, said Bowers. It will take a while to adjust, it's about the mispricing of credit that has gone on for three years.

The DJ Stoxx Banking Index, which tracks European banking stocks, was down 1.7 percent at 1325 GMT on Friday. Earlier in the day it was down by nearly 2.5 percent at its lowest level in about six weeks.

BADLY HIT

Barclays, at one point down 8 percent, was one of the biggest casualties, felled by market talk it was borrowing from the Bank of England and that it has been telling analysts to trim profit forecasts. Both Barclays and the Bank of England declined to comment.

Belgian-Dutch group Fortis was nearly 5 percent down after UBS downgraded the stock to sell from buy, saying the bank had revealed little about possible subprime exposures and could be vulnerable in a downturn.

Granted, some take a contrarian view. Standard Life Investments, which manages some 142.2 billion pounds ($296.2 billion), said on Friday it sees value in UK commercial bank stocks after their recent declines.

We've bought into the strong balance sheet names. In the UK, value is in banks as a lot of concerns are overdone. These banks may be incentivised to remove bad debt, said Richard Batty, Standard Life Investments' global investment strategist.

Yet an ominous signs for banks, which have to constantly adjust the value of their securities portfolios to reflect market values, is that the subprime crisis shows signs of deepening.

A key derivatives index tied to subprime mortgages, called the ABX, has been hitting new lows in recent days, signalling that the value of mortgage-backed securities held by banks is weakening and could force them to make fresh writedowns.

Positions in subprime are deteriorating by the day, said Dirk Becker at Kepler Securities in Frankfurt.

Many of them (banks) don't even know what their positions will be at the end of the quarter.

Europe's trio of banks with the biggest investment banking operations -- UBS, Deutsche Bank and Credit Suisse -- were all down.

UBS, seen by analysts as the most exposed to further subprime writedowns after it revealed its first quarterly loss in five years earlier in the week, shed 2.9 percent.

Spanish banks, which have said they have negligible subprime involvement, were relatively unscathed, with BBVA down just 0.6 percent and Santander up 0.3 percent.

Merrill Lynch