By Danilo Masoni
MILAN (Reuters) - European shares plunged on Friday, dragged down by heavy losses among banking stocks as Britain's vote to leave the European Union sent shockwaves across global markets.
Sterling hit a 31-year low and the slide in stocks wiped about 650 billion euros ($726 billion) from the market value of Europe's listed shares.
The pan-European STOXX Europe 600 index <.STOXX> fell 7 percent to 321.9 points, its biggest one-day fall since 2008, while the FTSEurofirst 300 slid 6.6 percent.
The falls were exacerbated by the fact that European equities had been rallying in the previous five session on expectations that Britain would remain in the EU.
"As investors were expecting continued EU membership, the vote came as a major surprise," said Bankhaus Lampe's Alexander Krueger in note, adding that equities were likely to show strong fluctuations in the next few quarters.
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Britain's shock decision raised concerns over the growth outlook for Britain and Europe and reawakened concerns of political instability on the continent, with some investors pointing to Italy as the next risk to watch, while Spain was due to hold a general election on Sunday.
There are also concerns for the integrity of the United Kingdom itself, with leaders in Scotland - where nearly two-thirds of voters wanted to stay in the EU - calling for a new independence referendum.
"While the referendum has left Britain in tatters, the EU needs to make a quality leap fast to avoid the emergence of populism," said Andrea Cuturi, of Anthilia Capital Partners in Milan.
"It's not an accident that Milan and Madrid (stock exchanges) are faring worst. Spain has a general election just around the corner and in Italy the government has just lost local elections and has a big banking problem to deal with."
Dragged mainly by banks, Milan's FTSE MIB <.FTMIB> and Madrid's IBEX
An escalation of political risk in Europe could put pressure on government bond yields, with banks in Italy and Spain seen as vulnerable because of their large exposure to sovereign debt.
"If there were a break up of the EU, (peripheral) government bond yield spreads would clearly spike but today thanks to the ECB the rise has been pretty contained," said Luca Riboldi, investment director at Banor SIM.
Europe's bank sector index <.SX7P> fell 14.5 percent, the biggest sectoral faller in Europe, also weighed down by concerns over the fallout of the UK vote on a regional economy already struggling with low growth.
Spanish lender Santander , which has UK exposure, fell 19.9 percent, while Italy's UniCredit and Intesa Sanpaolo both fell around 23 percent.
UK banks Barclays , Royal Bank of Scotland and Lloyds plunged between 17 and 20 percent.
European insurers <.SXIP> were down 11.3 percent, while auto shares <.SXAP> fell 8.7 percent.
London-listed gold producers Randgold and Fresnillo rose 14 and 11.8 percent respectively, topping gainers on the FTSEurofirst, on expectations that gold, seen as a safe-haven asset, will rise further.
Their gains, along with reassuring statements from policymakers, helped Britain's top share index <.FTSE> end off lows with a drop of 3.2 percent.
($1 = 0.8947 euros)
(Additional reporting by Atul Prakash in London; Editing by Robin Pomeroy)