European shares lose two per cent on economy, write-down fears

European shares ended sharply lower yesterday, reflecting growing investor concern over the US economy and the prospect of more write-downs at top banks as a result of the credit crisis.

The FTSEurofirst 300 index of top European shares ended 1.96 per cent lower at 1,309.34 points, with banks the top weighted losers as investors switched to select defensive food and pharma stocks.

French bank Natixis was the top loser on the FTSEurofirst 300, tumbling 11 per cent after it unveiled more than €1 billion of write-downs linked to the credit crisis.

UBS fell 3.8 per cent, taking its losses for the week to around 12 per cent as Citigroup said in a note that it expected more write-downs at the Swiss bank.

Preliminary February consumer sentiment data in the US disappointed, a gauge of manufacturing in New York State hit its weakest level since April 2003 and electronics retailer Best Buy issued a profit warning, shaking US stocks.

And Citigroup said it had suspended investor withdrawals from a $500 million credit hedge fund to give it a chance to "stabilise".

"The signs are that the US is gradually slipping into recession, the world economy is slowing, subprime problems are not going away and the technical picture looks dismal everywhere," said Philippe Gijsels, strategist at Fortis Bank in Brussels.

"We would recommend selling into any strength, reducing exposure to equities to neutral or underweight during any rally."

Banks fell across the board, with HSBC, BNP Paribas, Societe Generale, Barclays and Standard Chartered falling by 2.3 to 4.1 per cent.

Deutsche Postbank was one of the few financials to buck the trend, gaining 2.8 per cent on persistent takeover talk.

The FTSEurofirst 300 had a torrid January, recovering only towards the end of the month as the United States Federal Reserve stepped in with 125 basis point in two interest rate cuts.

Since hitting a low for the year early on January 22 ahead of the Fed's first rate cut, the index has clawed back seven per cent, but is still 20 per cent off its multi-year peak hit in mid-July, a magnitude of fall that many analysts use to characterise a bear market.

Financials have led the fall, rattled by a set of write-downs banks have been forced to make after being caught on the wrong foot by the credit market blowout.

UBS slumped on Thursday after unveiling tens of billions of dollars in new exposure to risky US mortgages, leveraged finance and complex securities, and investors punished the stock for the second day in a row yesterday.

"We estimate that the $80 billion remaining exposures could need 12-20 billion Swiss francs more markdowns in 2008," Citigroup said in a note on UBS published on Thursday.

"We continue to recommend an underweight stance on the European investment banks, with fears on revenue outlooks and balance sheet stretch as well as markdowns," Citi said.

Investors sought safety in defensives, with drugmaker GlaxoSmithKline rising one per cent after billionaire Warren Buffett's holding company Berkshire Hathaway picked up a small stake. Foods group Cadbury gained 1.9 per cent.

Elsewhere, German dialysis group Fresenius Medical Care gained 2.5 per cent.

French jet engine maker Safran jumped 6.2 per cent to top percentage gainers in Europe and miner Vedanta gained 3.4 per cent to top British gainers, both helped by brokerage upgrades.

Around Europe, Germany's DAX index lost 1.9 per cent, UK's FTSE 100 index was down 1.6 per cent and France's CAC 40 slid 1.8 per cent.