The financial panic sweeping Europe poses a danger to the health of banks across the Continent, Moody’s warned in a report Thursday.

The rating agency said the banking systems in six financially stressed European nations – Portugal, Italy, Ireland, Greece, Spain and the United Kingdom – face individual challenges arising from deep recessions, funding shortfalls, and fiscal pullbacks in their home countries.

But Moody’s also noted that it remains “cautious that market concerns may cause contagion risk that belies these differences, and that such market sentiment can be sufficiently strong (and long-lasting) to create its own reality and expose all these countries to a common threat.”

And the Moody’s report didn’t even address an issue that is increasingly weighing on the market as European policymakers struggle to find an answer to the Greek problems: the Greek exposure of banks in financially stronger nations such as France and Germany.

European Central Bank chief Jean-Claude Trichet said Thursday that a Greek default is “out of the question.” One reason the ECB doesn’t want to see a default is that French banks have $75 billion of exposure to Greek banks and German banks have $43 billion, according to year-end data from the Bank of International Settlements.

That compares to $16 billion for the United States and $12 billion for the U.K.The shares of big European banks have been dropping this week amid worries that the sovereign debt problems will wash back onto bank balance sheets, which have been slowly healing after the meltdown of 2008. That selloff steepened Thursday, with shares of the biggest European lenders dropping 5% or more.

Shares of Spain’s Santander  are off 20% this week, while the U.K.’s biggest bank, Barclays  is off 13% in New York trading. Germany’s Deutsche Bank  is down 12%.

The selling comes as European officials try to dampen the risk that turmoil in Greece will spread to other big debtor nations. Three people were killed Wednesday in a riot in Greece, where the government has promised to make deep cutbacks to help close a yawning budget gap. Trading in credit default swaps on Greek debt signals that investors believe there’s a 51% chance Greece could default on its obligations within five years, according to CMA.

While analysts have stressed that Greece is by far the worst fiscal offender in Southern Europe, with its wide budget gap, weak internal controls, and inaccurate financial reports, there have been signs this week that Portugal is being swept up in the panic. Yields on 10-year Portuguese bonds rose above 6% this week and were at 5.91% Thursday.

While that doesn’t approach the 11% yield on Greek bonds, it means Portugal is paying more than twice as much as Germany to borrow money for a decade.

Meanwhile, sentiment continues to deteriorate as official Europe struggles to come up with an answer. The ECB held its benchmark rate steady Thursday and didn’t announce any new policies, such as liquidity programs, to support the struggling southern nations.

The ECB’s inaction didn’t ease the fears sweeping Europe. The cost of insuring against a government bond default rose by double-digit percentages in Spain, Italy, and Ireland, and traders are now betting there’s a one-in-three chance that Portugal will default within five years.