Oct. 16 (Bloomberg) -- European stocks fell, driving the Dow Jones Stoxx 600 Index to its biggest two-day drop since 1987, on growing concern bank bailout plans in the U.S. and Europe will fail to avert a global recession.

Rio Tinto Group and Vedanta Resources Plc tumbled more than 13 percent after a report showed U.S. industrial production fell in September by the most in almost 34 years. Total SA, Europe's third-biggest oil company, slid 9.2 percent as oil dropped below $70 a barrel. Barclays Plc and ING Groep NV sank more than 11 percent after Citigroup Inc. said loss rates on credit cards and mortgages may climb to records.

``Investor confidence has been hammered,'' said Henk Potts, a London-based fund manager at Barclays Stockbrokers, which has about $45 billion in assets under management. ``There is a considerable amount of unease about how deep the recession could be.''

The Stoxx 600 lost 5 percent to 206.40 in London, bringing its decline to 11 percent since Oct. 14, the biggest two-day retreat since the 1987 crash. The index fell 16 percent on Oct. 19-20, 1987.

National benchmark indexes decreased in all of the 18 western European markets. The U.K.'s FTSE 100 slid 5.4 percent, and France's CAC 40 slipped 5.9 percent. Germany's DAX lost 4.9 percent.

VStoxx Soars

The VStoxx index, which measures the cost of using options as insurance against declines on the Dow Jones Euro Stoxx 50 Index, soared as much as 34 percent to 87.88 today, the highest in at least nine years. The index had slumped during the first two days of trading this week as stock markets rallied as $2 trillion was injected to unlock credit markets.

Hungary's BUX Index sank 8.6 percent today, extending yesterday's 12 percent tumble. The European Central Bank will lend as much as 5 billion euros ($6.7 billion) to the Hungarian central bank to help revive the local credit market.

The cost of protecting European corporate bonds from default rose, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 30 basis points to 740, according to JPMorgan Chase & Co.

Money-market rates fell in London and the three-month dollar rate dropped for a fourth day, the longest sequence of declines since June, as central banks and governments provided funding to ease paralysis in the credit markets. The overnight rate dropped to the lowest in almost four years.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans fell 5 basis points to 4.50 percent today, according to the British Bankers' Association. The overnight rate dropped 20 basis points to 1.94 percent, the lowest level since November 2004.

Spread Narrows

The Libor-OIS spread, a gauge of cash scarcity that measures the difference between the three-month dollar rate and the overnight indexed swap rate, narrowed 5 basis points to 340 basis points today. It was about 24 basis points in January.

Concern the seizure in credit markets will trigger a global recession erased $27 trillion in value from stocks worldwide, dragging the Stoxx 600 down 43 percent this year. Financial firms reported $654 billion in losses and writedowns from mortgage-related investments since the beginning of 2007.

Rio Tinto Group, the world's third-largest mining company, lost 13 percent to 2,050 pence. Vedanta Resources Plc, India's largest copper producer, sank 15 percent to 632.5 pence.

Copper futures for December delivery fell 4.55 cents, or 2.1 percent, to $2.165 a pound on the Comex division of the New York Mercantile Exchange. Earlier, the metal touched $2.0405, the lowest since Jan. 6, 2006.

U.S. production at factories, mines and utilities fell 2.8 percent last month, more than the 0.8 decrease predicted by economists. For the third quarter, output fell at an annual rate of 6 percent, the biggest decline since 1991.

Total, Shell

Total lost 9.2 percent to 33.20 euros. Royal Dutch Shell Plc, Europe's biggest oil producer, fell 7.2 percent to 1,294 pence.

Crude oil for November delivery sank as much as $5.97, or 8 percent, to $68.57 a barrel on the New York Mercantile Exchange. It reached a record $147.27 on July 11.

Barclays, the U.K.'s second-biggest bank, tumbled 11 percent to 213.5 pence. ING, the biggest Dutch financial- services company, retreated 15 percent to 10.12 euros.

Citigroup, the second-biggest U.S. bank by assets, increased its reserves for future losses by $3.9 billion.

TNT NV lost 13 percent to 15.38 euros. Europe's second- largest express-delivery company expects margins in international and domestic express operations to come in at a ``solid'' 9 percent for the full year with ``somewhat'' lower sales growth. TNT said in July that earnings before interest and taxes as a proportion of sales would be in the low double- digit percentage range.

Thomson

Thomson SA dropped 18 percent to 1.25 euros. The world's largest provider of TV set-top boxes posted a 13 percent drop in third-quarter revenue, hurt by lower sales from film- printing services, satellite decoders and broadcast equipment.

The Stoxx 600 was valued at 8.5 times earnings of companies in the index last week, the cheapest on record, and closed at 9.1 times profit yesterday. The MSCI World Index traded at 11 times the earnings of its 1,730 companies on Oct. 10, the lowest on record, and ended yesterday at 11.5 times profit.

``People who have an appetite for equity risk should absolutely be committing some money,'' said James Bevan, who helps oversee about $10 billion as London-based chief investment officer at CCLA Investment Management.

Slowing Growth

The Stoxx 600 rallied 13 percent in the first two days this week, its biggest two-day surge on record, as central banks and governments injected $2 trillion to bailout banks and unlock the credit market. Reports yesterday showing slow U.S. retail sales and U.K. unemployment climbing to the highest in since November 2006 sent stocks lower.

Germany slashed its 2009 growth forecast to 0.2 percent from a prediction of 1.2 percent made in April, Chancellor Angela Merkel said today.

Bayer AG dropped 8.6 percent to 38.28 euros after Merrill Lynch & Co. lowered its recommendation on shares of Germany's biggest drugmaker to ``neutral'' from ``buy.''

``We are increasingly concerned over the near-term outlook for Material Science and Crop Science due to global recession risk and falling commodity prices,'' analyst Sachin Jain wrote in a research note to clients today.

TUI Travel Plc slumped 22 percent to 194.4 pence. Europe's largest tourism company said majority owner TUI AG has ``no current intention'' of making an offer for the shares it doesn't own.

Travis Perkins Plc plunged 31 percent to 330.25 pence. The U.K. building-materials distributor that owns the Wickes home- improvement chain said it was scrapping its dividend to hoard cash.

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

Last Updated: October 16, 2008 12:57 EDT