European stocks close at lowest levels this year

Security fears pushed European blue-chip shares to their lowest levels this year yesterday as suspicion intensified that al Qaeda may have been behind last week's deadly train bombings in Madrid.

Investors, already wary after disappointing employment figures earlier this month, sought safe haven bets like government bonds and gold after the discovery at the weekend of a videotape from a purported al Qaeda spokesman claimed responsibility for the blasts that killed at least 200 people.

A senior US government official said yesterday he believed al Qaeda was involved in the attacks and media reports said initial investigations were also focusing on the Islamic militant group.

Spain's IBEX-35 index fell 4.2 per cent, leading European declines, after the surprise victory of Jose Luis Rodriguez Zapatero's Socialists in weekend elections.

Spanish banks and electricity utilities were particularly hard hit by uncertainties over the economic agenda of the new government, with electricity giant Endesa down 6.8 per cent and banks BBVA and Santander Central Hispano five and 4.4 per cent lower respectively.

The FTSE Eurotop 300 index of pan-European blue chips closed 1.9 per cent weaker at 970.4 points, having shed 3.2 per cent last week as global growth concerns were compounded by heightened security fears after the Madrid blasts.

The narrower DJ Euro Stoxx 50 index ended down 2.8 per cent at 2,756.1 points, its lowest close since December 30, 2003.

Some analysts said they believed the sharp reaction in recent days had been overdone.

Ian Scott, a strategist at Lehman Brothers, said markets were now pricing in an equity risk premium - the extra return required from stocks to justify a switch from no-risk government bonds - of 4.4 per cent, well in excess of the average of 2.4 per cent over the past 16 years.

"This differential gap of 200 basis points between the prevailing risk premium and the average equates to a move in stock prices of more than 30 per cent, real bond yields of 200 basis points or earnings estimates of 30 per cent. None of these seem especially likely to us."

European earnings continued to flow in with results from Lagardere, the world's largest magazine publisher, and defence electronics company Thales among yesterday's highlights.

Both companies reported better-than-expected earnings but not enough to ward off the market weakness, with Lagardere ending down 2.8 per cent and Thales off 2.4 per cent.

"Profits and margins are in a reasonable sweet spot at the moment and whilst most profits are coming through pretty well, the scope for further major upside surprises is probably fairly limited," said Michael MacPhee, a fund manager at Baillie Gifford in Edinburgh.

In New York, the blue-chip Dow Jones industrial average was one per cent lower at 10,133.6 points, while the Nasdaq Composite Index fell 1.7 per cent to 1,950.6 points by 1717 GMT.

Data showing US industrial production and capacity utilisation grew more than expected last month did little to soothe investor nerves.

Recovery watchers are more interested in what Federal Reserve Chairman Alan Greenspan has to say after a one-day meeting today, where rates are widely expected to be held steady.

Around Europe, London's FTSE 100 closed 1.2 per cent weaker, while Paris's CAC-40 ended down 2.4 per cent. In Zurich, the SMI fell 1.4 per cent and Frankfurt's volatile DAX closed 2.7 per cent weaker.