European shares shed one per cent as utilities, banks drag

European shares ended down yesterday as downbeat results from Germany's RWE hit utilities and poor US data fed concern that the world's largest economy is headed for recession, which weighed on bank stocks.

RWE shares fell nearly 6.5 per cent after Germany's second-largest utility earned less than expected and said earnigns could be flat this year, which knocked shares in rivals such as E.ON.

Auto stocks led by Renault and Fiat felt the pinch of a broker downgrade and a rise in the euro, which makes their exports less competitive.

The FTSEurofirst 300 index of top European shares ended down 0.8 per cent at 1,320.04 points. The index has fallen nearly 13 per cent since the start of the year.

The broader European market has risen for the second week in a row, but sentiment has been plagued by worries about the resilience of the US economy and corporate profitability.

"The markets are being pulled between information on the here and now, which is quite discouraging, and hopes that more aggressive action to try to reflate the US economy in say nine months' time will (make things) look a lot better," said Andrew Bell, a European strategist at Rensburg Sheppards.

US markets came under pressure after a broker downgrade of the two largest home financing companies, Freddie Mac and Fannie Mae, and after regional manufacturing data on Thursday reinforced the belief the economy is in recession.

RWE was the biggest percentage loser on the European index after it reported profit below expectations. German rival E.ON fell 2.2 per cent.

"RWE has missed its numbers and is definitely pulling down the sector," Philippe Gijsels, senior equity strategist at Fortis Bank said.

"Visibility on the earnings side is extremely low... Until that uncertainty lifts, we will be extremely cautious on the markets... We think troubles are not over yet," Mr Gijsels added.

French utility Gaz de France lost 4.3 per cent, while Spain's Iberdrola fell 1.9 per cent.

Carmakers were among the main losers, with Renault falling 4.5 per cent after Europe caught up with a price target cut that Morgan Stanley released late on Thursday.

Fiat, Porsche and Peugeot were among the top losers on the FTSEurofirst 300, as a combination of worry over high commodity prices and the US downturn hit the entire sector. The DJ Stoxx index of European automakers was down 2.9 per cent.

"These stocks were priced much higher (in 2007) than they usually would be in a normal cycle... Every time you have bad news in the economy, these companies hurt - if raw materials rise it will hurt automakers; if the dollar is weak, it will hurt automakers; if the US consumer is in trouble, it will hurt the automakers," Gijsels of Fortis Bank said. The euro hit two-week highs against the dollar.

Around Europe, London's FTSE 100 and Paris' CAC-40 both fell 0.7 per cent, while Frankfurt's DAX lost 1.4 per cent.

Financials, which have borne the brunt of the fallout from a crisis in the US subprime mortgage market, were mixed.

Lloyds TSB raised the writedown on its exposure to risky assets to 280 million pounds, but as it still managed a six per cent rise in underlying 2007 profit and increased its dividend, its stock jumped 4.8 per cent.

France's BNP Paribas fell 0.8 per cent, and Germany's Postbank gained 1.7 per cent. UBS shares lost 1.9 per cent.

The Financial Times said UBS, which has revealed nearly $18 billion in subprime writedowns, has contacted some of Europe's top bankers to join its board of directors and eventually replace the Swiss bank's chairman, Marcel Ospel.