Pricey oil, weak dollar pound European stocks

European shares closed lower yesterday, weighed by telecoms and oil-sensitive airlines, but late-session gains from technology blue chips such as Alcatel helped equity markets trim losses.

Alcatel added 2.7 per cent after a key deal between the French telecom equipment maker and US software giant Microsoft to develop internet television services.

A note from Smith Barney raising its sector weighting on technology hardware and equipment to "marketweight" from "underweight", and that on chip makers and chip equipment groups to "overweight" from "marketweight" also helped.

Chip makers Infineon and STMicroelectronics gained 2.2 and four per cent, respectively.

The FTSEurofirst 300 index slipped 0.7 per cent to 1,090.9 points, further retreating from recent 32-month highs as a duo of tumbling dollar and surging oil prices sapped sentiment across the board.

A spike of oil prices above $50 a barrel for the first time since November pounded fuel-hungry airlines like British Airways, with investors wary that higher energy costs will pinch corporate profits and curb consumer spending.

Meanwhile, a sharp drop in the dollar against the euro fuelled a sell-off in stocks exposed to unfavourable exchange rates like Airbus plane exporter EADS or car makers.

Volkswagen shares fell 1.1 per cent as the weak dollar wiped away €200 million from its luxury arm Audi's 2004 earnings. Valeo, whose margins suffer both from higher oil prices and the stronger euro, shed 1.4 per cent.

Heavily-weighted oil stocks fell after Repsol resurrected fears of low proven crude reserves among oil majors, offsetting the positive impact of higher crude prices.

Shares in Royal Dutch, the company still struggling to rebuild investor confidence after a reserves over-booking scandal last year, fell 1.2 per cent.

Highly-leveraged telecom groups were another weak spot amid lingering worries that inflationary pressures may force the US Federal Reserve to raise interest rates more sharply than expected. Fears that operators such as France Telecom, which sits on a €44 billion debt pile, would have to pay more interest on their debt sent their shares two per cent lower.

"After utilities yesterday, telecoms is the next sector people are going to look at and get worried about in an environment of rising interest rates and a sector backdrop of relatively slow earnings growth," said a trader.

Investors awaited the publication of US consumer prices today, which strategists said would provide some directional clues to the Federal Reserve's rate policy ahead.

The DJ Euro Stoxx 50 index was off 0.6 per cent at 3,045.2 points, with Frankfurt's DAX and Paris's CAC 40 showing losses of between 0.5 and 0.7 per cent.

London's FTSE 100 index was 0.6 per cent weaker, while the Swiss Market Index slipped 0.3 per cent.

Henkel fell five per cent after what some analysts deemed a very cautious guidance, while Corus and Arcelor fell about three per cent after Nippon Steel agreed to pay metals Brazilian group Companhia Vale do Rio Doce 71.5 per cent more for iron ore in the year starting April 1.

In New York, the Dow Jones industrial average was down 0.9 per cent to 10,690.6, while the technology-laced Nasdaq Composite Index shed 0.7 per cent to 2,044.5.