(Reuters) - European shares slid on Thursday, with banks the biggest fallers on worries that some of them will have to follow UniCredit and offer deep share price discounts when they recapitalize to shore up ravaged balance sheets.
Euro zone sovereign debt worries also hit sentiment.
Italy's UniCredit fell 17.3 percent, adding to a 14.5 percent fall on Wednesday, when it announced a massive discount on a rights issue.
The STOXX Europe 600 euro zone Banking Index fell 5.8 percent, and Italy's FTSE MIB index was down 3.7 percent.
The FTSEurofirst 300 index of top European shares fell 0.8 percent to close at 1,013.39 points, having hit a five-month high on Tuesday.
On Thursday, London's FTSE 100 closed down 44 points to 5,624, Germany's DAX closed down 16 points to 6,096, and France's CAC 40 closed down 49 points to 3,145.
The fall came despite upbeat jobs data. U.S. private-sector hiring surged in December as employers added 325,000 new workers while claims for jobless benefits fell, raising hope that recent labor market improvement would continue in 2012.
You'd think the UniCredit thing would have been priced in by now....though the market has been looking a touch overbought, said Mike Lenhoff, chief strategist and head of research at Brewin Dolphin Securities, in London.
Hopefully the (U.S. labour) figures aren't a fluke and will be endorsed by a decent set of non-farm payrolls tomorrow. If we get that the markets will pick up and go.
The correlation between the euro and European shares was in evidence on Thursday, as hedge funds and macro funds shunned the shared currency despite solid demand at a French auction of long-dated government bonds. The euro fell 1.3 percent against the dollar and hit its lowest since September 2010.
The scale of euro zone debt was once again in focus. Spain and Italy both face debt auctions next week, and their bond yields rose by 15 to 20 basis points despite the European Central Bank buying bonds in the secondary market.
Spain's equity benchmark IBEX fell 2.9 percent, hit almost as badly as Italy's.
The market is watching the sovereign debt position very closely and any signs that the yields are rising highlights some of the hurdles the euro zone has to overcome over the course of 2012, said Henk Potts, equity strategist at Barclays Wealth.
Some work has to be done by banking institutions in order to improve their capital ratios. There was an element of surprise about the size of the discount UniCredit had to offer and this kind of news affects market sentiment.
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets said investors should keep their defensive positioning and stick to sectors such as healthcare and food and beverages.
Healthcare stocks outperformed the broader market, with the sector index flat. Food and beverages shares rose 0.4 percent.
Lenhoff remained upbeat on the prospects for equities, ahead of aluminium company Alcoa kicking off the fourth-quarter U.S. reporting season on Monday.
Given the good economic newsflow we've seen you would have thought some of that would be reflected in earnings, he said.
Among individual stocks, struggling phone maker Nokia rose 7.1 percent, on brightening prospects for its much-hyped Windows phone as it prepared to strengthen the hand of new boss Stephen Elop by replacing its old-guard chairman.