Banking stocks in Italy and elsewhere in Europe rebounded Wednesday after the country watered down a plan to whack its banks with a surprise one-off 40% tax on their windfall profits.

The finance ministry said late Tuesday that the levy would be capped at no more than 0.1% of a lender's total assets "in order to safeguard the stability of the banks."

Shares in Intesa Sanpaolo rose 3.2% in afternoon trade, after falling 8.7% Tuesday following the announcement of the tax, while major lenders UniCredit and Banco BPM rose 4.2% and 4.4% respectively, after falls of 5.9% and 9% the day before.

The government's climbdown eased investors' fears over European banks more broadly. The Stoxx Europe 600 Banks index, which tracks 42 big banks in the European Union and the United Kingdom, gained 1.7% after shedding 3.5% the previous day.

Late Monday, the government said it would impose a one-off windfall tax of 40% and would use the proceeds to support first-time home buyers and cut taxes for families and businesses.

Analysts at Deutsche Bank wrote in a note Wednesday that the cap would likely reduce the amount payable by banks by 40%.

Several European countries, including Spain and the Czech Republic, have announced taxes on banks' windfall profits in the past year as interest rate hikes by central banks have beefed up many lenders' earnings. Rising official rates have allowed banks to raise the cost of loans to households and businesses.

UK finance minister Jeremy Hunt said in June that it was "taking too long" for savers to feel the benefits of high official interest rates, particularly for those who wanted quick access to their money deposited at banks.

The country's financial regulator met with bosses of the biggest UK banks last month to ask why the rates on their savings accounts lag so far behind the central bank's main interest rate, and to urge them to pay savers more.

Bank stocks' losses Tuesday were also driven by news that Moody's had downgraded 10 smaller US banks and put the credit ratings of six big lenders under review for a possible downgrade.

The credit ratings agency said late Monday that its actions reflected "ongoing strain" in the US banking sector, more than four months after the collapse of two regional lenders fueled a global banking crisis.