March 2 (Bloomberg) -- European stocks posted their biggest drop since December, sending the Dow Jones Stoxx 600 Index to a six-year low, as Warren Buffett said the U.S. economy is in a “shambles” and concern grew that banks will need more capital.

HSBC Holdings Plc tumbled 19 percent in London, the biggest fall since at least 1992, after saying it plans to raise 12.5 billion pounds ($17.7 billion) in a rights offer. BHP Billiton Ltd., the world’s largest mining company, and Royal Dutch Shell Plc decreased more than 6 percent as metals and oil slid.

“Things are getting worse,” said Alex Crooke, portfolio manager at Henderson Global Investors in London, which has about $125 billion. “The economy is still deteriorating and bad debts are still going to appear,” he said in a Bloomberg Television interview.

The Stoxx 600 sank 5 percent to 164.30, while the U.K.’s FTSE 100 slid 5.3 percent to 3,625.83. Both gauges closed at the lowest levels since 2003. Italy’s S&P/MIB Index lost 6 percent.

The MSCI Emerging Markets Index retreated 4.8 percent, while Hungary’s forint fell after European Union leaders spurned aid pleas for eastern Europe.

The Dow Jones Industrial Average declined below 7,000 for the first time since 1997, while the Standard & Poor’s 500 Index retreated as much as 3.9 percent. Buffett, chairman of Berkshire Hathaway Inc. said in his annual letter to shareholders that the U.S. economy will be a “shambles” this year and perhaps longer, before recovering from the reckless lending that caused the worst “freefall” he ever saw in the financial system.

U.S. Stocks

The S&P 500 retreated for a third straight week last week as the U.S. Treasury agreed to convert as much as $25 billion of Citigroup Inc. preferred shares into common stock in a third rescue attempt for the lender.

The yield on the 10-year Treasury note fell ten basis points to 2.92 percent today, according to BGCantor Market Data, as investors sought assets perceived as safe.

The Stoxx 600 has posted six straight monthly declines as the U.S. economy contracted at the fastest pace since 1982, forecasts at companies from Novartis AG to Deutsche Post AG disappointing investors, and the economic crisis in eastern Europe deepened.

“This is a bear market and patience is what you need,” said Lucy MacDonald, London-based chief investment officer of global equities at RCM UK Ltd., which has about $100 billion under management. “We need to see stabilizing of economic and corporate profit growth,” she said in a Bloomberg Television interview.

Raising Capital

HSBC tumbled 19 percent to 399 pence. The bank plans the U.K.’s biggest rights offering as it eliminates 6,100 jobs and closes consumer lending units in the U.S. after subprime losses cut profit.

Europe’s largest bank by market value will sell shares for 254 pence each, with existing investors able to buy five shares for every 12 they already own.

While HSBC has set aside about $53 billion to cover bad loans during the past three years, it has avoided taking U.K. government funding, unlike Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.

Lloyds retreated 15 percent to 49.4 pence, bringing its two- day slump to 34 percent. RBS slipped 2.6 percent to 22.6 pence.

A measure of U.K. real estate companies fell the most in two decades on concern the rights offer by HSBC might derail their own fundraising. The FTSE 350 Real Estate Index of 18 companies slid 8 percent.

Segro, British Land

Segro Plc, the U.K.’s largest owner of business parks, fell 24 percent to 81.5 pence after the company said it was considering a rights offer. British Land Co., which is raising 740 million pounds in a share sale, fell 13 percent to 400 pence.

A gauge of European banks slid 10 percent, the steepest retreat since October. BNP Paribas SA, France’s biggest bank, slid 9.3 percent to 23.57 euros, extending its 2009 drop to 22 percent.

Intesa Sanpaolo SpA, Italy’s second-biggest bank by assets, fell 8 percent to 1.78 euros. UniCredit SpA, Italy’s largest bank, declined 9.1 percent to 91.8 cents.

The cost of protecting bonds sold by Intesa Sanpaolo and UniCredit from default rose to a record, according to CMA Datavision. Contracts on Intesa Sanpaolo rose 22 basis points to 180, CMA prices in London show. UniCredit rose 29 basis points to 234.

Commerzbank, AIG

Commerzbank AG, Germany’s second-largest bank, lost 7.4 percent to 2.59 euros. Chief Executive Officer Martin Blessing said Germany’s second-largest bank may need more cash from the government, though it’s fine for now, Frankfurter Allgemeine Sonntagszeitung reported.

American International Group Inc. today announced a $61.7 billion loss. The insurer deemed too important to fail will get up to $30 billion in new government capital in a revised bailout, the U.S. Treasury and Federal Reserve said.

BHP fell 6.5 percent to 1,034 pence. Rio Tinto Group, the world’s third-biggest mining company, declined 6.6 percent to 1,682 pence. Copper, lead, nickel and tin all retreated on the London Metal Exchange.

Shell, Europe’s largest oil producer, lost 6.2 percent to 1,450 pence. BP Plc, the region’s second-biggest, slid 5.7 percent to 422.75 pence. Crude oil fell for a second day on signs that manufacturing in the world’s two biggest energy consumers contracted last month, cutting fuel demand.

The MSCI EM Eastern Europe Index slid 3.7 percent after European Union leaders spurned pleas for special aid for eastern Europe and a rescue package for automakers, bowing to German concerns over budget deficits as the economic crisis escalates.

Last week three international lenders -- the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank -- announced loans of up to 24.5 billion euros ($30.9 billion) for eastern European banks.

The Hungarian forint dropped as much as 2.7 percent to 307.52 versus the euro, and the Polish zloty weakened 2.5 percent to 4.7734 versus the euro.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

Last Updated: March 2, 2009 13:29 EST