RBS Up But Europe Banks Dogged By Capital Worries

Belgian banking and insurance group KBC led fallers with a 7 percent drop on worries that it will need more government cash.

Britain's bank shares rebounded but most European rivals were on the back foot early on Tuesday as fears that more lenders will need state help or raise capital as economies sink into recession rattled investors.

Royal Bank of Scotland and most UK banks bounced back from Monday's collapse, but the rebound was modest compared to the scale of the fall and European rivals were dogged by the gloom about whether more cash will be needed.

By 0920 GMT The DJ Stoxx European bank index was down 0.2 percent at 123.8 points. The index fell to a 14-year low of 121 points on Monday, when news of a big loss at RBS prompted Britain to increase its stake in the bank to 70 percent, shaking confidence across the sector.

Belgian banking and insurance group KBC led fallers with a 7 percent drop on worries that it will need more government cash.

KBC, which received a 3.5 billion euro ($4.6 billion) cash injection in October to boost its capital, has almost halved in value in the past week on concern it needs to write down more on its collateralised debt obligations (CDO) portfolio and will need more capital.

France's BNP Paribas lost 5 percent as it is also seen as one of Europe's banks most in need of raising funds, analysts said.

UK banks bounced back, with Barclays up 6.8 percent and Lloyds Banking Group up 1.5 percent. RBS rallied 17 percent to 13.6 pence, but is still down 61 percent this week.

Investors in the sector continued to grapple with the threat of nationalisation and more writedowns and bad debts against historically very low valuations.

"Investors in UK banks are in a binary position," said Bruno Paulson at Bernstein, saying they face being wiped out through nationalisation or significant upside if the company survives to reap high returns from a concentrated market.

"While the risk of nationalisation is real, particularly at RBS ... the chance of survival does look distinctly higher than the 10-20 percent implied at RBS and the 25-40 percent implied at Barclays given the current share prices," Paulson said in a note.