Oil drags European stocks lower

European shares closed lower yesterday, racking up their third straight weekly decline as falling metal and oil prices hit miners and energy stocks but farm chemicals maker Syngenta rose after posting higher sales.

The pan-European FTSEurofirst 300 index closed 0.4 per cent weaker at 1,172.4 points on solid turnover of around three billion shares.

The index gave up around 1.8 per cent during the week and has fallen more than five per cent from a 41-month peak of 1,242 points earlier this month.

Strategists at Citigroup attributed the recent sharp sell-off in financial markets to investors' concern about falling liquidity as growth slows and the rate of inflation rises.

"According to market reaction over the past two weeks, it seems that financial markets have reacted most likely to rising fears of either stagflation (ugly) or sharply higher interest rates (also ugly)," Citigroup said in a note.

"Our economists subscribe to neither of these scenarios and instead highlight a modest mid-cycle economic growth environment persisting through 2006. We continue to believe that such an outcome can drive decent returns from European equity markets."

The Eurofirst 300 is still up 12 per cent this year and investors and technical analysts said crucial support levels have not yet been breached.

"It's just a bit of a retracement. We are not back at the bottom of the upward trending range," said Kevin Lilley, a European equities fund manager at Royal London Asset Management.

US stocks were mixed at 1616 GMT, with the Nasdaq Composite Index up 0.5 per cent to 2,078.6 points, boosted by a 12 per cent jump in Web search company Google after it reported forecast-beating results.

The blue-chip Dow Jones industrial average was 0.6 per cent weaker at 10,220.2 points as heavy machinery maker Caterpillar fell 9.5 per cent after cutting its outlook due to a weak third-quarter.

A fall in US crude oil prices to $59.15 a barrel, the lowest level since late July, failed to support the broader market, which was hit by weakness in oil shares.

Royal Dutch Shell shed 1.8 per cent, BP gave up 0.5 per cent and Total fell 0.7 per cent.

Weaker commodity prices also weighed on miners, with Antofagasta down 2.3 per cent and both Anglo American and BHP Billiton down about 1.5 per cent.

Copper prices on the London Metal Exchange shed more than six per cent after hitting a record $4,018 a tonne the previous day, raising concerns the market had peaked.

Around Europe, London's FTSE 100 lost 0.4 per cent, Paris's CAC-40 was down 0.6 per cent and Frankfurt's surrendered 0.5 per cent.

Standout losers included Compass, down 5.8 per cent after the British caterer said it was suspending the head of one of its divisions and investigating its dealings with the United Nations.

BT Group sank 2.4 per cent after pay-TV company BSkyB agreed to buy broadband Internet firm Easynet. The deal will enable Sky to offer broadband, television and phone services and bring it into head-to-head competition with BT, analysts said.

Syngenta closed up 2.5 per cent after a two per cent rise in third-quarter sales beat forecasts, while a positive outlook from online gambling firm PartyGaming sent its shares up 10 per cent.