European debt woes on Thursday weighed heavily on bank stocks, which closed lower even after recovering from a sharp free fall earlier in the session.

The KBW Bank Index fell 4.53%, to 52.50, after dropping as far as 10% at one point as investors worried that the debt problems in Greece could spread to other European nations. Moody's Investors Service warned that the fiscal crisis could threaten banks in Britain, Portugal, Spain, Ireland and Italy.

The Dow Jones Industrial Average fell 3.2%; the S&P 500 Index, 3.24%.

In the U.S., banking reform was also under the spotlight again as Treasury Secretary Timothy F. Geithner and his predecessor, Henry Paulson, told a panel that regulators didn't have enough power to limit risk before the crisis. Both indicated that they didn't support forcing commercial banks to spin off their riskier units, though.

Separately, Federal Reserve Chairman Ben Bernanke said the central bank isn't waiting for lawmakers to enact reform to step up oversight of financial institutions by making sure they strengthen their risk management and capital levels.

Large and midsize lenders were down across the board.

JPMorgan Chase & Co. fell 4.27%; Bank of America Corp., 71.3%; Wells Fargo & Co., 4.53%; Keycorp, 6.67%; M&T Bank Corp., 3.59%; Marshall & Ilsley Corp., 6.67%; SunTrust Banks Inc. 4.63%; and U.S. Bancorp, 3.56%.

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