LONDON, Aug 8 Reuters An index of euro zone banks sank as much as 3.4 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.

The index was on track for its biggest daily drop since the turmoil in the banking sector in March, when Credit Suisse collapsed.

By 0802 GMT the index had recovered some losses, but remained down 2.2, underperforming a broader index of European banks which fell 1.4 and the panEuropean STOXX 600 which was down 0.1.

Italian banks led losses in the sector. BPER Banca was last down 7.8, while Intesa Sanpaolo fell 6.8 and FinecoBank Banca Fineco dropped 7.4.

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 Italy39;s example, said Stuart Cole, chief macro economist at Equiti Capital.

Only for 2023, Italy will tax 40 of banks39; 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 3.29 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 country39;s deputy prime minister said.

The cost of insuring against the risk of default for Italian banks rose on Tuesday. Fiveyear credit default swaps for…