UPDATE 3-European shares drop as manufacturing crash spells more pain

* STOXX 600 starts April quarter with near 3% slump

* Euro zone factory activity crashes in March

* "Severe" euro zone recession seen in H1- analyst

* Banks among top losers after majors suspend dividends
(Updates to close)

By Ambar Warrick and Sagarika Jaisinghani

April 1 (Reuters) - European shares ended Wednesday lower
amid increasingly dire economic readings due to the coronavirus,
while bank stocks plummeted as several majors suspended dividend
payments.

The pan-European STOXX 600 index closed 2.9% down,
with Tuesday's session rounding off its worst quarter in nearly
18 years during which it lost about $2.8 trillion in market
value.

A survey showed that euro zone manufacturing activity
collapsed in March, with analysts predicting that prolonged
disruptions in the sector could have a lasting, deep-seated
impact on the economy.

"Because business activity and production have been slashed
to extremely low levels and containment measures still have to
prove their effectiveness, most firms are confronted with a
dramatic fall in revenues, which is bound to lead to a rapid
rise in unemployment," said Davide Oneglia, Economist at TS
Lombard.

"We expect a severe recession in the euro area in H1 and
only a modest recovery thereafter."

Profit for companies listed on the STOXX 600 is now expected
to slide by a fifth in the second quarter, deepening a European
corporate recession, while dividends paid by those firms are
forecast to fall by about 40%.

Bank stocks were among the worst performers for the
day, dropping 5.8%. Heavyweights HSBC, Santander
and Lloyds of London were among the biggest
drags on the sector after suspending dividend payments to shore
up liquidity.

Travel and leisure stocks dropped 6.4%, negating the
prior session's gains as the sector still faced immense pressure
from widespread movement restrictions due to the outbreak.

Cruise operator Carnival PLC sank around 20% after
ratings agency Moody's downgraded the firm's senior unsecured
rating. The stock also bottomed out the STOXX 600.

"It would be naive to assume that the virus saga is already
priced in," said Charalambos Pissouros, senior market analyst at
JFD Group.

"We see decent chances for equities to trade south and for
safe-havens to shine again."

A fall in stocks across the Atlantic also rattled investors,
as the impact of the outbreak was reflected in a batch of poor
economic readings from the world's largest economy.

The risk-off sentiment on Wednesday drove investors to the
perceived safety of gold, while in European equities, health
care and telecom stocks, commonly considered
defensives, posted the smallest declines.

Italian tyre maker Pirelli & C dropped 6.3%,
ranking among the worst performers on the country's benchmark
after its head shot down talks of a merger with brake maker
Brembo.
(Reporting by Sagarika Jaisinghani in Bengaluru; Editing by
Bernard Orr, Shounak Dasgupta, William Maclean)