European shares hit as interest rate fears resurface

Fresh interest rate worries pushed European shares to their worst closing level in two weeks yesterday, with economically-sensitive sectors such as basic producers, car makers and construction hit harder.

There was one stock riser for every 10 declining issues, but BAA was part of the rare gainers, closing 2.2 per cent higher after the world's biggest airports operator agreed to a £10.1-billion takeover bid from a consortium led by Spain's Grupo Ferrovial.

Europe's FTSEurofirst 300 index shed 1.9 per cent to 1,280.55 points, bringing to nine per cent the index's overall losses since hitting a five-year high of in early last month.

Equity investors remained haunted by the risk that a too aggressive monetary tightening on both sides of the Atlantic might smother economic growth and hit corporate profits.

Worries about central banks going one step too far resurfaced after US Federal Reserve Chairman Ben Bernanke pledged to remain vigilant on inflation, and the Wall Street Journal quoted St Louis Fed President William Pool as saying that it was safer to err on the side of "going a little too far" on raising interest rates to lower inflation expectations.

Some market observers said investors were over-reacting but it could be a while before they realise it.

"We may have seen the worst of the bout of profit taking but we could see the market continue to trade sideways in a range that's going to exhibit a considerable amount of volatility until everyone feels a bit happier about where interest rates are eventually going to set," said Mike Lenhoff, chief strategist at Brewin Dolphin in London.

In the meantime losses were widespread across Europe as some investors now worried the European Central Bank might raise interest rates by 0.5 percentage points tomorrow instead of the widely forecast 0.25 percentage points.

London's FTSE 100 index shed 1.6 per cent and Paris's CAC 40 and Frankfurt's DAX slipped 2.4 per cent and 2.1 per cent, respectively.

The biggest European sector index decliner was the DJ Stoxx basic resources, with the energy sector also down nearly two per cent as worries over economic growth hit commodity prices.

Miner Anglo American fell five per cent. The mining index has now lost 18 per cent since hitting a record high on May 11.