LONDON, Aug 8 (Reuters) – European Bank shares tumbled on Tuesday after Italy approved a 40% windfall tax on banks for 2023, sending shivers across the sector that has recorded surging profits as global interest rates have risen.

A gauge of euro zone banks (.SX7E) fell 3.7% by 0938 GMT, set for its biggest daily drop since the turmoil in the banking sector in March, when Credit Suisse collapsed. European banks (.SX7P) fell 2.7% and the pan-European STOXX 600 (.STOXX) index was down 0.7%.

Italian banks (.FTITLMS3010) led losses. Its two biggest lenders, Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI), fell 7.9% and 6.6% respectively. BPER Banca (EMII.MI) was down 9.2% and FinecoBank (FBK.MI) dropped 8.2%.

“These government interventions in Europe do not help provide the necessary stability to lower the risk premium attached to the eurozone. This is not just an Italian thing, Spain had done the same last year,” said Gilles Guibout, head of equities strategies at Axa Investment Managers in Paris.

Analysts at Bank of America estimated the new tax could cost Italian banks between 2% and 9% of their earnings.

The fall-out touched other banks in the currency bloc, including Spain’s Banco Santander (SAN.MC), which fell 3%, and Germany’s Deutsche Bank (DBKGn.DE), down 2.7%.

Only for 2023, Italy will tax 40% of banks’ net interest margin, a measure of income banks derive from the gap between lending and deposit rates. The government expects to collect less than 3 billion euros ($3.3 billion) from the measure, sources close to the matter told Reuters.

Proceeds from the windfall tax will be used to help mortgage holders and cut taxes, the deputy prime minister said.

“The tax that Italy has levied on the excess profits that banks are perceived to be making has come as a surprise and is likely raising concerns that over countries could follow Italy’s example,” said Stuart Cole, chief macro economist at Equiti Capital.

The cost of insuring against the risk of default for Italian banks rose on Tuesday. Five-year credit default swaps for Intesa and UniCredit both rose to their highest since July 11, according to S&P Global Market Intelligence.

News that ratings agency Moody’s on Monday downgraded the credit ratings of 10 U.S. banks by one notch was also seen as negative for the sector.

“It is the windfall tax without a shadow of a doubt, the U.S. news just adds salt in the mix and obviously does not help sentiment,” said Stephane Ekolo, an equity strategist at Tradition.

Reporting by Lucy Raitano in London and Danilo Masoni in Milan, editing by Alun John and Amanda Cooper