"With banking rumors surfacing yesterday, it feels like the run-up to Lehman's collapse, where banks don't trust each other," said Commerzbank rate strategist Christoph Rieger.

The three-month euro-dollar cross-currency basis -- which reflects the premium for swapping euro Libor into dollar Libor -- widened to as much as 95 basis points, up around 40 bps since the start of August, though still well short of the 300 bps seen at the height of the financial crisis.

Emergency overnight borrowing from the European Central Bank surged, with banks taking over 4 billion euros of overnight funds from the ECB, the highest since mid-May.

The signals coming from Europe set off alarm bells in Asia. Banking sources told Reuters that one bank in the region had cut credit lines to major French lenders, while five others were reviewing trades and counterparty risk.

Investors saw the latest loss of confidence as a sign that few of the problems that brought bank lending screeching to a halt last time around have really gone away.

"The market is already broken. It has never fully recovered anyway from 2008. Liquidity comes in fits and starts, and risk appetite in the banks is understandably very modest," said Stephen Snowden, fixed income manager at Aegon Asset Management.