Europe stocks end down on rates hike, soft Wall Street

European shares ended lower yesterday as a rise in British interest rates, unimpressive results from French bank BNP Paribas and a soft start on Wall Street weighed on sentiment.

On Wall Street, stocks fell as investors shied away amid worries about rising oil prices, a likely rise in US interest rates this summer and continuing violence in Iraq.

The FTSE Eurotop 300 index of pan-European blue chips closed down 1.38 per cent at 994.49 points, erasing gains of the last three days, while the narrower DJ Euro Stoxx 50 index fell 2.04 per cent to 2,765.74 points.

Trade was solid at over three billion euros with losers outnumbering winners by 10 to one.

"You've had a fantastic 12 months return and I think after that great performance last year, most people had not really anticipated more than 7-10 per cent this year," said Adrian Darley, a European fund manager at Gartmore Investments.

"It's all about stock selection now. The first year of an equity market recovery there are very big sector moves, but if you look at the second year of recovery... the differences between sector performances are much, much reduced."

European markets have stalled in the past couple of weeks as investors took profits from strongly performing cyclical and technology stocks.

But in general, earnings have been consistently coming in at or above expectations and valuations remained reasonable in most parts of the market, Darley added.

Interest-rate decisions from the Bank of England and the European Central Bank came through as expected, with the Bank of England raising rates by 25 basis points to 4.25 per cent and the ECB holding steady at two per cent.

Banks, currently enjoying very supportive conditions, are likely to suffer in a rising interest-rate environment and a re-weighting into defensive stocks is recommended, Ben Funnell, European strategist at Morgan Stanley, said.

In New York, the blue-chip Dow Jones industrial average was 1.15 per cent lower at 10,192.93 points, while the Nasdaq Composite Index fell 1.51 per cent to 1,927.6 points.

Crude prices hit a fresh 13-year high near $40 a barrel yesterday on fears over Middle East supply security and potential gasoline shortages over summer in the United States.

The energy sector ended softer after giving up early gains which had pushed the sector index up 0.8 per cent to touch its highest level since August 2002.

The energy index finished down 0.07 per cent at 298.69. points. Shell closed up 0.56 per cent at 406 pence, down from an intraday high of 410 pence while BP gained 0.35 per cent to 503.92 pence.

"Oil is the biggest overweight we've got in the portfolio," Morgan Stanley's Funnell said.

Elsewhere, shares in BNP fell 3.3 per cent after it posted a 31 per cent rise in first-quarter profit, beating forecasts, but the figures were swelled by a 65 per cent jump in one-off gains.

British Airways slid as high oil prices and worries about cut-throat competition in the sector eclipsed news of a recovery in its passenger traffic in April.

Its shares finished down four percent at 267 pence. Shares in security services firm Securitas tumbled 12.6 per cent after its first-quarter profits fell well short of expectations.

Catering giant Sodexho Alliance shed 9.17 per cent after reporting a dip in first-half operating profit and declining to confirm its full-year margin forecast.