Growing fears that the Federal Reserve may raise borrowing costs as soon as next month pushed European shares to a six-week closing low yesterday, with interest-rate sensitive stocks such as financials the hardest hit.
Telecoms further weighed on the market as Vodafone slipped three per cent after Japan's top mobile operator NTT DoCoMo forecast a bigger-than-expected decline in operating profit this year, while fading hopes for a takeover pounded British mobile operator mmO2 six per cent lower.
Troubled French heavy engineering group Alstom was among Europe's top declining issues, shedding 8.5 per cent to €1.29 after Lehman Brothers set a target price of €0.15 on the share and said it saw limited upside in the stock.
A forecast-beating jump in first-quarter operating profit at Danish pharmaceutical group Lundbeck was a rare piece of good news in an otherwise sluggish market, where sentiment was sapped by lingering concerns that premature rises in US interest rates could smother world economic growth.
"In such an environment we think that equity markets will continue to fret about a slowdown next year and the impact of those rate moves on certain sectors," said James Barty, a European equity strategist at Deutsche Bank.
The FTSE Eurotop 300 index of pan European blue chips closed 2.6 per cent lower at 969.4 points, bringing to six per cent the benchmark index's losses since a 22-month high set just two weeks ago.
The narrower DJ Euro Stoxx 50 index dropped 2.6 per cent to about 2,685 points.
Deutsche's Barty said cash might be the asset class of choice in the immediate future but insisted that any significant weakness in equity markets would be a reason to buy back.
Strategists said the outlook for equities was not as bleak as it seemed as interest rates would be rising from very low levels and the economy and corporate profits are improving.
"It would appear that equity markets have largely ignored the very positive first-quarter earnings news, which came well above already bullish expectations," said JP Morgan strategist Jan Loeys. "These near-term worries will not go away overnight, but we believe that soon enough, equity investors will focus again on the positive cyclical story for equities."
Investors are waiting for US data on retail sales and producer prices on Thursday, and Friday's consumer prices report to determine the likelihood of the Federal Reserve raising interest rates at the next rate-setting meeting.
In the meantime, financials could be among the stocks hardest hit by the prospects of higher interest rates. Societe Generale and Barclays shed 4.3 per cent and 1.8 per cent respectively. Fortis fell 3.9 per cent.
UBS slipped 4.5 per cent after the Federal Reserve said Switzerland's largest bank agreed to pay a $100 million fine to settle allegations it illegally transferred funds to parties in countries subject to US economic sanctions.
Comments by leading oil exporter Saudi Arabia that OPEC should raise supply helped world oil prices recede from 13-year peaks and soothed earlier worries that soaring crude prices will spark inflation and reduce consumers' spending power.