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European bank shares slid on Friday on fears they will be hit by far-reaching U.S. plans to limit bank activity in lucrative operations and by the threat that other countries will back similar curbs on the industry.

Some European banks could see a small bite taken out of profits by the proposals, but the main impact is the threat that political and regulatory clouds will continue to hang over the sector for months.

U.S. President Barack Obama on Thursday threatened to fight Wall Street banks with new proposals to limit financial risk taking, sending U.S. bank stocks tumbling.

"The biggest risk is that we're under a cloud of uncertainty all the way through to the U.S. mid-term elections, which is effectively for the whole year," said Simon Maughan, analyst at MF Global.

European banks also fell on the news in late trading on Thursday, and by 0815 GMT the DJ Stoxx European Bank index was down 1.6 per cent at 213 points.

Hardest hit were European banks with big U.S. businesses, but shares of HSBC, Europe's biggest bank, were less affected because of the institution's greater focus on Asian markets.

Credit Suisse, Deutsche Bank, Barclays led fallers, with shares in each down about 4 per cent. UBS, Royal Bank of Scotland, Societe Generale and Santander shed over 2 per cent.

European banks conduct less propriety trading than U.S. firms such as Goldman Sachs, and some have already been pulling back from that area amid a regulatory and political backlash since the start of the financial crisis.

However, Deutsche Bank's fixed income and over-the-counter businesses are most at risk from the proposals among banks in the region, JP Morgan said in a note to clients.

Still, European investment banks could see 6 per cent to 8 per cent of their value destroyed if Mr. Obama's main measures were adopted globally, according to an estimate by Matthew Clark at Keefe, Bruyette & Woods. Other analyst estimates ranged from under 5 per cent to up to 15 per cent.

"The really interesting thing is what Europe is going to do, and I can only think they will copy Obama," said Helvea banking analyst Peter Thorne. "These measures are not going to be restricted to the U.S., the anger that Obama and others have expressed is reflected in Europe."

The proposals, which need congressional approval, would be the most far-reaching overhaul of U.S. banking since the 1930s.

They would prevent banks from investing in, owning or sponsoring a hedge fund or private equity fund and bar banks from proprietary trading. They also would set a new limit on banks' size.

European lenders could also benefit if some of Wall Street's top names are weakened, some analysts said.

Yet it was the prospect of more political intervention unsettled investors.

"The direction of the proposals indicates tougher than previously anticipated regulatory moves," said Raul Sinha, analyst at Nomura, saying they had a potentially negative revenue impact for international banks with a presence in the United States.

"New regulations are being proposed thick and fast and the industry faces major uncertainty from these," he added.

"Obama's proposals are a return to Glass-Teagall in all but name," said Simon Willis, an analyst at NCB Stockbrokers, referring to the Depression-era U.S. law that separated retail and investment banks.

UK fund manager Cavendish Asset Management said the moves showed "the creeping political tenor of financial debate" that could damage the system.

The British Bankers' Association, an industry lobby group, said UK banks were already working with regulators and the international authorities and it would study the latest proposals to see where the U.S. and international proposals align with what is already being discussed.

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