European stocks end two per cent lower on rate worries

European shares suffered sharp losses yesterday in a broad sell-off as worries about the outlook for interest rates weighed on markets, with financial stocks taking a hit, and US markets also declining.

Among the main losers, HSBC shed 3.2 per cent and oil firm BP lost 2.7 per cent. The Dow Jones industrial average was down one per cent at 11,160.1 points.

The pan-European FTSEurofirst 300 index ended 2.2 per cent weaker at 1,293.4 points, near the intra-day low.

The index is down eight per cent from a near five-year high of 1,407.5 struck on May 11 when the sell-off began in global equities. The index is, however, up two per cent from a five-month low of 1,267.7 points and up just 1.4 per cent so far this year.

"It seems like a run in the bear market on macro economic concerns but not corporate profitability. The selling is not coming on huge volumes, and lots of investors appear to be on the sidelines," said a trader.

Financial markets might get some hints today on the outlook for US interest rates when the minutes of the Federal Reserve's last rate-setting meeting are released.

European markets were all in the red, with London's FTSE 100 index down 2.4 per cent, Paris's CAC 40 down 2.4 per cent, Frankfurt's 30-share DAX 2.3 per cent lower and Zurich's SMI off two per cent.

Among financial stocks, UBS lost 2.8 per cent, ING fell 3.4 per cent, and Barclays shed 3.6 per cent.

Bucking the market trend, shares in British airports operator BAA rallied 6.4 per cent after Spanish construction group Grupo Ferrovial raised its bid for the UK firm, but BAA said it was still too low.

"Although equity markets are showing signs of stabilising, they are still well down from their highs for the year and uncertainty about inflation and global growth may mean they do not rebound quickly," said Tony Dolphin, director of strategy at Henderson Global Investors.

"Although the falls have been driven by increased risk aversion, rather than deteriorating economic fundamentals, risk aversion was at unusually low levels, and investors may remain a little more cautious," he said.

The VDAX index of German equity volatility jumped nearly 17 per cent to 22.6, just below a two-year high of 23.28 struck on May 22 at the height of the recent equity sell-off.

Comparing the recent sell-off in equities with previous corrections of 10 per cent or more since 1980, strategists at Goldman Sachs said previous market falls lasted an average of 65 days, with an average decline of 23 per cent.

"Although some further near-term volatility is possible, and our market timing tools have yet to flag a buy, we do think stocks should be higher in six months time," analysts at Lehman Brothers said in a global strategy note.

In the foreign exchange markets, the dollar fell sharply against the euro and other major European currencies and the yen after US consumer confidence this month fell to a three-month low.

The euro was at $1.2890, up more than one per cent from Monday's close in its largest one-day rally since mid-April.