Eurostocks drop, insurers, telcos slide; Astra up

Zurich Financial and other insurers dragged European shares lower yesterday as jitters over possible attacks as the September 11 anniversary looms added to doubts over the pace of economic recovery.

Wall Street was closed for Labour Day, which left investors without a key source of direction and kept dealings light.

Airline shares like Lufthansa sank after details of a thwarted potential hijacking of a flight from Sweden last week renewed fears over the sector's vulnerability to terrorism.

Renault and other autos skidded after French sales of new cars in August fell for the fourth straight month, with telecoms weak too, as renewed concerns over its links with Germany's Mobilcom hit France Telecom.

By 1538 GMT, with only Frankfurt still officially trading, the FTSE Eurotop 300 index of European blue chips was off 1.9 per cent at 938 points and the narrower Euro Stoxx 50 was down 2.6 per cent at 2,639 points.

Declining issues outpaced advancers by nearly three-to-one. Although the benchmark is still up about 15 per cent from its five-year intraday low of July 24, investors disagree if stocks have seen their lows for the year and where they go from here.

"We have the view the market in Europe is likely to retest the lows we saw in July over the course of September and October," said Jason James, European strategist at HSBC bank.

"The main problem is overvaluation in technology, and very likely large rights issues in telecoms and possibly insurance. We have not convincingly hit bottom yet and the US market looks overvalued to us," James said.

Others were slightly more optimistic. "We've probably seen the bottom but it would be premature to talk about a strong rebound," said Juliet Cohn, senior portfolio manager at Dresdner RCM Global Investors.

Uncertainty about the market's direction is fomented by data showing that economic recovery may be too patchy to revive corporate profits speedily.

The Reuters Eurozone Purchasing Managers' survey yesterday showed an across-the-board slowdown in August as companies struggled to win business. The index dropped to 50.8, just above the critical 50 line that divides growth from shrinkage.

Attention now turns to counterpart numbers in the United States with the release of the Institute of Supply Management index for August today, with a slight increase forecast.

Shares in Zurich Financial slumped 11 per cent after a Swiss newspaper reported that Europe's third-largest insurer is poised to announce a share capital increase worth $2.5 billion when it reports on Thursday. The company had no comment.

Insurers came under additional pressure after investment bank Morgan Stanley cut its recommendation on the sector to "cautious" from "in-line", and raised the spectre of radical restructuring in the industry because of capital shortfalls.

France's Axa dropped 5.3 per cent, also burdened by fears that the details of its final results will disappoint when it reports after the Paris close. The UK's Royal & Sun Alliance - another rights-issue candidate - slid 5.2 per cent.

Insurers have come under concerted pressure this year due to their exposure to weak markets through their equity portfolios.

Techs were weighed down by a 5.6 per cent drop in Swedish telecom equipment maker Ericsson which closed a complex $3.2 billion rights issue, but analysts said the group may need to raise even more cash to keep it on course.

Shares in France Telecom endured an extended late slide after the L'Expansion magazine reported that the French government was in talks aimed at replacing Michel Bon at the helm of the debt-ridden company.

The report cited official disappointment at Bon's handling of MobilCom, the group's troubled German affiliate, but traders also fretted about a possible switch in strategy.

"A change at the helm would mean a change of strategy, which could mean a capital increase - news they don't need," said one Paris-based trader.

British mobile phone giant Vodafone fell 3.6 per cent on worries it will have to dip into its coffers after a report in the Financial Times that it is preparing to make an eight billion euro hostile bid for SFR, the French mobile phone company controlled by Vivendi Universal.

Meanwhile, British Airways and Lufthansa led the airline sector down, shedding between four per cent and six per cent each, after last week's alleged botched hijacking of a London-bound plane drew attention, traders said, to the risks of further attacks ahead of the September 11 anniversary.

Elsewhere, Europe's No.2 drugmaker AstraZeneca bucked the weaker trend, adding 3.6 per cent after data showed its cholesterol-lowering drug Crestor was more effective than an alternative across a wide range of doses.

But shares in French peer Sanofi-Synthelabo tumbled almost 9.7 per cent after saying it expected sales to grow slightly slower in the second half than in the first half.