France's biggest listed bank, BNP Paribas, froze 1.6 billion euros ($2.2 billion) worth of funds on Thursday, citing U.S. subprime mortgage sector problems.

The news sent shivers through nervous financial markets. It came as Germany's Bundesbank met to discuss a rescue package for lender IKB, which has been hit by the subprime crisis too.

BNP Paribas, the eurozone's second biggest bank by market capitalization, said the subprime crisis was preventing it from calculating the value of the asset-backed securities funds and barred investors from redeeming cash from them.

The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly, regardless of their quality or credit rating, it said in a statement.

In order to protect the interests and ensure the equal treatment of our investors during these exceptional times, BNP Paribas Investment Partners has decided to temporarily suspend the calculation of the net asset value as well as subscriptions/redemptions, in strict compliance with regulations, for these funds, it added.

BNP Paribas said the three funds had declined rapidly in value in the past few weeks to 1.593 billion euros ($2.19 billion) at August 7, down from 2.075 billion at July 27. The bank has 326 billion euros under management.

BNP Paribas Investment Partners said the decision affected its Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia funds.

Valuation of the funds would resume as soon as liquidity returned to the market and, in the continued absence of liquidity, additional information on the envisaged measures would be given to investors within a month, the firm said.

EQUITIES SLIP BACK, GOVT BONDS RALLY

Subprime mortgages are the riskiest property loans, often extended to people who have payment difficulties or a bad credit history.

Several major U.S. companies have announced losses from exposure to these subprime loans, causing a widespread fall in stock markets.

Traders said that the BNP Paribas statement had helped cause a drop in European stock markets in early trade. BNP Paribas shares themselves were down 3 percent, among the top losers on France's benchmark CAC-40 index.

Euro-zone government bond futures rallied on the news while equities slipped. European credit markets gave up their early gains.

With BNP's announcement this morning I think the sector will take a beating again, said Ion-Marc Valahu, head of trading at Amas Bank in Switzerland.

(Additional reporting by Blaise Robinson, Marcel Michelson, George Matlock and Richard Barley).

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