Major stock indexes fell more than 2 percent on Tuesday on fears the euro zone's sovereign debt crisis was worsening and the U.S. economy was sliding back into recession.

European equities also dropped, extending the previous session's 4 percent decline, with bank shares hitting a 29-month low on worries about the political handling of the euro zone debt crisis.

Swiss shares bucked the trend, boosted after Switzerland's central bank intervened to drive down the value of the franc. The Swiss index gained 4 percent.

The PHLX Europe sector index slumped 5.3 percent. U.S.-listed shares of Credit Suisse slumped 13.7 percent to $23.62.

Isn't everything about Europe right now? Realistically, it's what is going to happen with Italy, what is going to happen with Greece, what is going to happen with Germany. That is the big issue, said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Europe is where you have to be focused right now, and Europe doesn't look good.

European and U.S. stocks briefly pared losses after data showed the pace of expansion in the U.S. services sector unexpectedly accelerated in August. Data on Friday showed zero net U.S. employment growth and stoked recession concerns.

The Dow Jones industrial average dropped 265.16 points, or 2.36 percent, to 10,975.10. The Standard & Poor's 500 Index fell 29.26 points, or 2.49 percent, to 1,144.71. The Nasdaq Composite Index lost 55.36 points, or 2.23 percent, to 2,424.97.

Big U.S. banks, in talks with state officials on settling claims of improper mortgage practices, have been offered a deal that could limit legal liability in return for a multibillion-dollar payment, the Financial Times reported.

Bank of America Corp lost 5.8 percent to $6.83 and JPMorgan Chase & Co fell 4.7 percent to $33. The KBW Bank index declined 3.8 percent.

The region's stocks had tumbled 4 percent on Monday, with financial issues falling to their lowest in more than two years. U.S. markets were closed for the Labor Day holiday on Monday.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)

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