BCS Barclays PLC

LONDON—U. K. and European bank shares rebounded Tuesday as the pound gained ground and markets took a pause after two days of heavy selling.

Barclays PLC and Lloyds Banking Group PLC were both up around 6% despite two credit-rating downgrades Monday night for the United Kingdom. The two banks's fortunes are closely tethered to the U.K. economy and spending and investment. Italian banks also gained after reports Monday the Italian government might inject €40 billion ($44.11 billion) into its banks.

Analysts at investment banks and brokers made dire warnings Monday that Britain leaving the U.K. would disrupt operations at many U.K. and European banks and that political, regulatory and business uncertainty will persist for months. The sector has seen many downgrades, and some banks' shares hit all-time lows Monday.

At the lower prices, Credit Suisse analysts on Tuesday said the market "could already be close to pricing contagion of a full Brexit." They said policy makers also will be more likely to act because of the selloff. But the Credit Suisse analysts said banks weren't positioned for the market turmoil and what it means for revenue, and earnings could fall.

Late Monday, the U.K. lost its triple-A rating from Standard & Poor's Global Ratings over Thursday's vote to leave the European Union. The ratings agency called it "a seminal event" that will lead to the country having a less predictable, stable and effective system.

Fitch Ratings also cut the U.K. rating and predicted "an abrupt slowdown" in economic growth.

U.K. and European banks have taken the brunt of investors' fears that Brexit will damage the U.K. and European economies and could create turmoil across the EU bloc. Many hedge funds were net holders of European stocks in the lead-up to last week's referendum, according to notes from investment banks, leaving them exposed in the rapid selloff.

Write to Margot Patrick at margot.patrick@wsj.com

(END) Dow Jones Newswires

June 28, 2016 06:25 ET (10:25 GMT)

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