European banks led markets lower Monday as U.K. took a battering following perceived 'hard Brexit' comments from Prime Minister Theresa May that could mean the loss of financial services passports which allow them to operate freely across the EU.

Such a loss could see Britain's financial sector forced to hold multiple regulatory licenses and, potentially, subjected to onerous capital requirements in the aftermath of the U.K's eventual exit. Remaining inside, however, would be a contentious move for those who favor and exit from the EU, placing May between a rock and a hard place, given that membership requires the acceptance of the block's freedom of movement for people - as well as harmonized and regulation and laws overseen by Brussels.

RBS (RBS) was the hardest hit in London, down more than 2.5% by 15:00 GMT, with Lloyds Banking (LYG) following closely behind with a loss of 1.7%.

In Europe the sector was the standout decline in a session that saw all equity markets trading in the red, with the Stoxx Europe 600 Banks index falling 1.95% to trade at 173.24, the lowest since Jan. 2.

A portion of the move could also be linked to comments from Germany's vice-Chancellor Sigmar Gabriel, an ally of Angela Merkel but also a potential political challenger, told the country's Der Spiegel newspaper Saturday that a breakup of the block as a whole is no longer unthinkable.

Lamenting years of German-enforced austerity, Gabriel cited fiscal policy as a major factor behind the rise of Europe's equals to Donald Trump, or so-called populist politicians.

In a riposte against austerity, the German leader spoke of having asked Merkel; "what would be more costly for Germany: for France to be allowed to have half a percentage point more deficit, or for Marine Le Pen to become president?" Merkel is yet to provide an answer. 

Gariel, the Social Democrat leader, has advocated laxer fiscal rules and more generosity from Germany toward troubled member state - a deeply unpopular idea in post-crisis Germany.

"I know that this discussion is extremely unpopular but I also know about the state of the EU. It is no longer unthinkable that it breaks apart," he said.

Commerzbank (CRZBY) and Deutsche Bank (DB - Get Report) were among the biggest fallers in the European banking sector on Monday, down 2.6% and 2.2% respectively at a few minutes before 0900 EST.

Societe Generale (SCGLY) and Natixis (NTXFF) were the big losers in France, aided in their trek lower by valuation concerns and recent unfavorable coverage from the analyst community. Soc Gen was down 2.7% a little before 0900 and Natixis was off by 2.4%