By Barbara Kollmeyer, MarketWatch

MADRID (MarketWatch) — Europe stocks turned sharply lower on Wednesday as global worries piled on investors. Fears of a government collapse in Portugal, turmoil in Egypt and downbeat data from China dented sentiment, with all sectors in the red.

A downgrade from Standard & Poor’s hit three of Europe’s biggest banks.

The Stoxx Europe 600 index XX:SXXP -1.25% fell 1.4% to 283.24, a day after closing 0.4% lower in the prior session.

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On the worry list was fears of another crisis in Europe. The biggest hits were seen in Portugal, where the PSI 20 index PT:PSI20 -5.59% tumbled 6.5% to 5,160.05, with Banco Comercial Portugues SA PT:BCP -11.83% sinking 13% and Banco Espirito Santo SA PT:BES -10.29% dropping 12%. The yield on Portugal’s 10-year government bond BX:TMBMKPT-10Y +21.44% shot above 8%.

Portugal assets tumbled on fears the government may not survive the second resignation of a cabinet minister, as Reuters reported more ministers may be ready to go.

Prime Minister Pedro Passos Coelho said he will not step down after Foreign Minister Paulo Portas resigned Tuesday afternoon in protest over the country’s austerity policies. On Monday, the country’s finance minister, Vitor Gaspar, stepped down.

“Expect the government to fall in the course of the next 48 hours. A new election will be called amid a huge drive towards ‘anti-austerity,’” said Steen Jakobsen, chief economist with Saxo Bank. “This is EXACTLY what German Chancellor Angela Merkel does not need.”

Losses in Europe pressured U.S. stock futures, which were sharply lower ahead of a shortened day for Wall Street and a busy one for data.

Investors were also keeping a close eye on turmoil in Egypt, with crude-oil prices soaring above $102 a barrel as President Mohammed Morsi refused to step down, as clashes amid protests over his rule turned deadly on Tuesday. Morsi has just a few hours to go to a deadline imposed by the military, which called on him to resolve the country’s political crisis or the army will step in. Read: Egypt’s Morsi rebuffs calls to step down

Reuters
A Deutsche Bank logo is pictured in front of the Deutsche Bank headquarters in Frankfurt February 24, 2011.
Banks in Portugal were not the only ones suffering. Shares of Barclays PLC UK:BARC -2.82% BCS -1.33% and Deutsche Bank AG DB -2.02% DE:DBK -3.09% dropped over 4% and Credit Suisse SA CS -1.25% CH:CSGN -4.09% fell over 3% after Standard & Poor’s lowered its long-term ratings on those banks. The ratings firm said new regulations and uncertain market conditions will make it tougher for those banks to operate.

The German DAX 30 index DX:DAX -1.73% fell 2% to 7,748.42 as shares of Adidas AG DE:ADS -4.12% sank 5% after Deutsche Bank cut shares to hold from buy. BMW AG DE:BMW -2.65% fell 3% after J.P. Morgan Cazenove cut the automaker to neutral from overweight. The investment bank said it was switching out of BMW into Daimler AG DE:DAI -0.06% , which it lifted to overweight from neutral. Shares of Daimler fell 1.6%.

The French CAC 40 index FR:PX1 -1.75% fell 1.6% to 3,678.56, with BNP Paribas SA FR:BNP -3.23% sinking over 4% in line with European banks. Shares of heavyweight Total SA FR:FP -1.14% fell 1%, not helped by a sharp rise in crude prices.

London stocks were under equal pressure as losses for Barclays helped knock 1.6% off the FTSE 100 index UK:UKX -1.67% to 6,204.40. Mining stocks were among those losing ground — BHP Billiton PLC BHP -0.05% UK:BLT -3.62% slid 3.7% and Rio Tinto PLC RIO -2.07% UK:RIO -3.06% sank 2.8% — after China services data showed sluggish growth in June.

ARM Holdings PLC ARMH -0.16% UK:ARM +1.12% was nearly the only gainer in London, up 1% after UBS lifted those shares to buy from neutral on the view a pullback in shares due to news-flow looks overdone.

Barbara Kollmeyer is an editor for MarketWatch in Madrid. Follow her on Twitter @MWBarbaraKollmeyer.