The rumors tapped into investors’ worst fears of contagion from euro zone debt troubles and led European markets lower.
French bank stocks were hit hard.
The turnaround in equities followed a morning of gains in Europe and Asia prompted by the US Federal Reserve’s dovish promise on Tuesday that it would keep interest rates low for another two years.
Shares of Societe Generale plummeted as much as 23 percent before trimming some losses to trade down 14.7 percent. BNP Paribas dove 9.5 percent.
A Societe Generale spokeswoman denied all market rumors about the bank. It also asked France’s stock market regulator to open an investigation into the source of the rumors.
Losses in bank shares also sent Wall Street lower following two days of extreme volatility that included the sharpest drop in nearly three years on Monday after Standard & Poor’s downgraded its AAA credit rating for the US.
US and European indexes tumbled by more than 3 percent.
The euro dropped more than 1 percent against the dollar.
“Memories are fresh. I think people who during the last financial crisis did not sell right away, next time around are ready to sell quick and ask questions later,” said Ed Crotty, chief investment officer at Davidson Investment Advisers in Great Falls, Montana.
Wall Street’s favorite fear gauge, the CBOE Volatility index, jumped 13.2 percent after earlier rising more than 20 percent. It was the third session in the last five the index has seen a jump of at least 20 percent.
Speculation France’s AAA rating may be at risk initially rattled markets, though the three major agencies reaffirmed the top-tier rating.
“I think there’s concern about just how much Greek debt French banks really do hold and how much the European Central Bank is willing to backstop all this,” said Bret Barker, portfolio manager at TCW in Los Angeles, which has $65 billion in fixed-income assets under management.
Recent selling has followed attempts by politicians and central banks on both sides of the Atlantic to prevent or contain debt crises.
Not surprisingly, the relief rally sparked by Tuesday’s Fed comments turned out to be short lived.
Investors saw the Fed message as double edged. The central bank signaled it was willing to keep the US economy afloat.
At the same time, it acknowledged just how much trouble the world’s largest economy was in.
By mid afternoon Wednesday indexes had given up a chunk of Tuesday’s gains.
The Dow Jones industrial average dropped 203.70 points, or 1.81 percent, to 11,036.07 in early trade. The Standard & Poor’s 500 Index lost 15.83 points, or 1.35 percent, to 1,156.70.
The Nasdaq Composite Index was off 24.45 points, or 0.98 percent, to 2,458.07.
The MSCI all-country world index, which has fallen as much as 20 percent from a May high, was down 1.4 percent after earlier gains. The FTSEurofirst 300 of leading European shares closed down 4 percent.
The euro traded down 1.2 percent at $1.4190, after sliding to a session low of $1.41620 on trading platform EBS. It lost 2.1 percent to 108.42 yen.
The search for safety drove investors into US Treasuries and gold. The benchmark 10-year Treasury note was up 23/32 in price after briefly posting a full point gain, its yield falling to 2.16 percent, down from 2.24 percent late on Tuesday.
The 30-year Treasury bond was up 2-3/32 in price to yield 3.53 percent, down from 3.68 percent at Tuesday’s close.
Gold racked up a third record in a row, extending its best rally since 2008. Spot gold rose near 3 percent to hit a high of $1,796.86.
