Eurostocks end lower on US rate fears

European shares ended sharply lower yesterday on concern ahead of a key US inflation report about the size of a possible Fed interest rate hike, while accounting worries hit engineering group ABB.

Lufthansa was another heavy loser, off 4.2 per cent after news the German airline had agreed a framework with its trade union that makes working times and pay talks more flexible to cut labour costs, according to sources close to the talks.

Under the deal, German ground staff would still work 37.5 hours per week, throwing out plans by Lufthansa Chief Executive Wolfgang Mayrhuber to increase the working week to 40 hours.

Equity markets were bedevilled by worries that inflation, whipped up by high oil prices, could force the Federal Reserve to tighten borrowing costs more aggressively than expected and risk crimping economic growth and corporate profits.

The FTSE Eurotop 300 index of pan-European blue chips ended 1.44 per cent weaker at 989.4 points - its lowest close in seven sessions - while the narrower DJ Euro Stoxx 50 index shed 1.35 per cent to 2,759.3 points.

Investors were on tenterhooks ahead of today's US consumer price report after a greater-than-forecast 1.2 per cent rise in May US retail sales propelled the US trade deficit to a new record and highlighted heat in the US economy.

"The US figures have surprised on the upside for the past two months and will be watched carefully for signs of further deterioration in the inflation outlook," said Keith Wade, chief economist at fund firm Schroders.

Investors also awaited comments from Fed Chairman Alan Greenspan in Senate testimony today, after Minneapolis Fed President Gary Stern became the latest US official to comment on the need to keep inflation in check.

Mr Stern's comments added fuel to speculation that the Fed may raise rates by as much as 50 basis points at its June 29-30 meeting.

Fears of rising inflation and higher interest rates in the world's largest economy have prevented stock markets from extending a year-long rally between March 2003 and March 2004, despite strong profit growth, reasonable valuations and an accommodative stance from the European Central Bank.

"We think this will change as the improving fundamentals become increasingly visible in terms of improved shareholder returns (especially higher dividend payments and buybacks)," said Lehman Brothers strategist Ian Scott who retains an "overweight" position on European equities.

But other market watchers were slightly less bullish, pointing that a higher rate environment would have an impact on growth and hence on corporate profitability.