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* European stocks hit session lows after poor U.S. PMI
* German flash manufacturing PMI shows lowest reading in6-1/5 yrs
* Banks, auto stocks post steep falls(Updates to include U.S. PMI data, closing prices)
By Susan Mathew and Medha Singh
March 22 (Reuters) - European stock markets deepened losseson Friday, closing near session lows, as fears of a slowdown inglobal growth after weak manufacturing data from across Europewere exacerbated by dismal data from the United States.
After downbeat manufacturing activity from Germany reignitedfears of a recession in the region's biggest economy, theinversion of the U.S. yield curve after similar U.S. data stokedfears that the world's largest economy may also be slipping intorecession.
The pan-European STOXX 600 index, which had openedhigher on relief at the extension of Britain's Brexit deadline,slipped for a third day to close down 1.2 percent to take weeklylosses to 1.3 percent - its steepest this year.
The London and Paris bourses sank more than2 percent, while Frankfurt and Madrid faredonly slightly better with roughly 1.5 percent declines.
The euro zone-wide flash PMI also showed businessesperformed much worse than expected this month, while Frenchbusiness activity slowed unexpectedly.
The classic gauge of fear – known as impliedvolatility, which tracks demand for options in European stocks –hit more than 9-week highs and posted its biggest weekly rise ina year, the first concrete sign of activity in a while.
Almost all sectors within the STOXX 600 were in the red withbanks, auto and chemicals sectors downmore than two percent each, along with industrial goods andservices stocks. The bank sector posted its biggestdaily drop sine early February.
Italian lenders Unicredit, Banco BPM,and UBI led losses among banks after Credit Suisse saidthe market is underestimating Italian banks' net interest incomechallenges.
Nestle, the world biggest food group, was thebiggest drag on the benchmark, down 1.7 percent, followed bymore than 2 percent dips in HSBC Holdings and oil andgas majors Total BP PLC.
"With numerous headwinds facing the manufacturing sector inGermany – including a slowdown in the automotive sector, Brexit,U.S.-China trade and a global economic slowdown – there's littleto be optimistic about," said Craig Erlam, senior market analystat Oanda in London.
Most European bourses had opened on a stronger footing,relieved at the European Union's agreement to at least atwo-week reprieve that precludes Britain crashing out of thebloc without a deal next week.
Despite the relief from the summit overnight, there weremore signs of firms making preparations for a no-deal Brexit, asBritish Prime Minister Theresa May now faces task of persuadinga deeply divided parliament to back her Brexit deal. A no-dealexit could well have a depressive effect on Europe's majoreconomies.
Goldman Sachs analysts reduced the likelihood of May's dealpassing to just 50 percent, while raising the chances of"no-deal" to 15 percent. The bank continues to put the chancesof no Brexit at all at 35 percent.
The odds of a no-deal exit had fallen to just 5 percent ononline betting market Betfair.(Reporting by Medha Singh, Patrick Graham and Susan Mathew;Editing by Toby Chopra)
