European stocks sink to two-week lows

European share indexes fell to two-week lows yesterday, with telecoms shares battered by European Union plans to cut roaming charges and with surprise economic data raising concerns about higher interest rates.

Investors were also on edge ahead of the US central bank's interest rate decision due at around 1915 GMT.

Higher crude prices helped oil majors such as BP and Royal Dutch Shell buck the broad market trend.

The FTSEurofirst 300 index of leading European shares ended 0.54 per cent down at 1,364.90 points - its lowest close since March 13.

The Munich-based Ifo institute's German business climate index rose to a 15-year high of 105.4 this month from an upwardly revised 103.4 last month, sending euro zone government bond futures to one-year lows.

Economists had expected the index to fall to 102.8 and some now saw growing prospects that the European Central Bank (ECB) will raise rates in May.

"The odds for a rate hike as early as May are clearly on the rise," Dresdner Kleinwort Wasserstein said in a note. The ECB last tightened this month, taking the key rate to 2.5 per cent.

The US Federal Reserve is widely expected to deliver its 15th straight 0.25 percentage point increase in the key rate to 4.75 per cent.

"Any suggestion that the hawkish stance will now be coming to an end may be sufficient to lift stocks out of the recent reversion," said Matt Buckland, trader at CMC Markets.

The pan-European DJ Stoxx telecoms index fell 2.1 per cent, hit by plans for an EU regulation aimed at cutting the cost of using handsets in other member states, or roaming, a move expected to dent earnings of operators facing fierce price competition.

"We believe that a possible abandonment of roaming charges is already incorporated into consensus forecasts and valuations. Nevertheless, such serious regulation trends make the recovery of the sector's valuation difficult," DZ Bank said.

Vodafone fell four per cent and Telefonica lost 1.1 per cent. Bear Stearns said the end of Vodafone's share buyback next month made the stock an unattractive short-term prospect.

Germany's top-30 DAX index rallied briefly after the surprising Ifo number, which local brokerage Steubing said "supports our assumption that the economic recovery is gaining momentum (and that) this year's earnings story is based on rock solid footings."

But Schroders Investment said slower global economic growth would reduce the pace of corporate earnings-per-share growth.

Investors should switch to growth stocks, whose P/E ratios have come down to attractive levels, from value stocks, said Virginie Maisonneuve, Schroders head of equities for Europe, Australia and the Far East.

The relative valuation gap between growth and value stocks was now back at the 1995 level, meaning that "growth stock valuations are extremely favourable," Maisonneuve said.