European stocks hit by inflation concerns

European bourses drifted lower in holiday-hit trade on Friday as concern over inflationary pressures in the United States weighed on investors, while French hotelier Accor fell heavily after a costly stake acquisition.

Shares in Accor, Europe's biggest hotel group, slumped 4.4 per cent to €33.20 after it bought a near 30 per cent stake in holiday village operator Club Mediterranée for €252 million.

The deal values Club Med shares at €45 each - a 31 per cent premium to Thursday's closing price. Club Med's shares soared 9.1 per cent to €37.40.

The FTSE Eurotop 300 index of pan-European blue chips was off 0.23 per cent at 1,003.69 points while the narrower DJ Euro Stoxx 50 index eased 0.17 per cent to 2,795.39 points.

"We are advising clients to take whatever profits they have and bring down risks," said a Munich-based trader.

"Markets are just focusing on rates, terrorism and oil prices. Company profits have been solid but there's a fear that these can't be sustained over next few quarters," he said.

Despite indices trading lower, European markets are set to rack up a fourth straight week of gains, rebounding from 2004 lows hit in May.

Volume was light at near €1 billion, less than half the daily average, as activity remained muted with US financial markets closed for the state funeral of former president Ronald Reagan.

"I can't remember a quieter day. It's like pulling teeth," said David Buik of spread betting firm Cantor Index.

Economic issues remained in focus amid scant corporate news flow after the Federal Reserve Bank of St Louis president told Reuters US inflation could rise more quickly than forecast, and that if it happened the Fed would have to raise interest rates faster and farther than originally planned.

"Everyone is looking to see whether we are going to get a 50 basis points rise. This is creating levels of uncertainty," said Buik.

The Fed has held overnight interest rates at a 46-year low of one per cent since last June. But it is widely expected to raise them by 25 basis points at its next meeting on June 29-30.

The US Consumer Price Index, which economists expect will show a monthly gain of 0.4 per cent, will be closely watched when it is released on Tuesday.

"A 25 basis points Fed Fund target hike is consensus, with concerns it could be as much as 50 basis points. However, following Fed Chairman Greenspan's widely discussed speech this week, expectations could change next week when the May CPI and PPI are released," JP Morgan strategists said in a note.

"Higher than expected inflation would be negative for equities - investors are in no mood for surprises, in our opinion," they said.

Winners included French chemicals maker Rhodia up 1.8 per cent to €1.12 after it said asset sales this year should yield €880 million, more than expected, helped by the company's sale of its North American phosphates business.

European aerospace giant EADS rose 2.7 per cent to €20.81 after its Airbus unit won a jet order from Shanghai-based China Eastern Airlines Co. worth up to $2 billion.