European shares close over half per cent lower

European shares closed more than half a per cent lower yesterday after economic data on both sides of the Atlantic increased investor uncertainty on the outlook for inflation and interest rates.

British Energy was the standout loser, dropping more than eight per cent on worries over repairs at two of its nuclear generators.

Europe's FTSEurofirst 300 index closed 0.6 per cent lower at 1,366.2 points, with the wider DJ Stoxx 600 down 0.5 per cent at 333.97 points.

Bourses were hit by the ZEW survey, which showed that German investor sentiment fell more sharply than expected this month, just as a clutch of euro-zone central bankers were broaching the topic of the ECB pushing rates above the 3.5 per cent level that is expected to be reached by December.

A surprise dip of 0.4 per cent in US core producer prices offered some support but a separate report showed a bigger-than-expected fall in US housing starts last month.

Investors were already cautious ahead of the Federal Reserve's next interest rate decision today, following last month's pause after 17 straight increases.

"The reality is people are struggling to get confident with what exactly is going on. The signals from economies are mixed, sometimes contrasting," said Stephen Dowds, head of international equities at Northern Trust.

"You can't be daft and think everything is going to go on without any blips. In general we are optimists and think central banks have been doing a good job and that takes time for investors to be comfortable with."

European markets were just closing when news broke that Thai Prime Minister Thaksin Shinawatra had declared a state of emergency in Bangkok shortly after Reuters witnesses saw tanks surrounding Government House.

Germany's DAX index fell 0.9 per cent to 5,873.5, having been down 0.3 per cent before the ZEW data.

Britain's FTSE 100 shed one per cent and France's CAC 40 dropped 0.6 per cent as US stocks slipped.

Traders said macroeconomic worries had sparked a sector rotation away from banks and insurance stocks.

Among other standout fallers, miner Kazakhmys slipped 4.4 per cent on fears that the chief executive, who is quitting at the end of the year, would sell his stake.

Concerns about the quality of the group's results and prospects also weighed, although its shares had opened higher on news that it more than doubled half-year profits and beat analyst forecasts.

Energy stocks lent some support, with oil prices steady after a fresh delay to restarting production at BP's Thunder Horse oilfield in the Gulf of Mexico. BP nonetheless ticked up 0.3 per cent.

US light crude futures later fell more than one per cent to $63 a barrel after European equity markets closed.

UK project manager John Laing jumped seven per cent after saying it had agreed to an £887 million bid from fund manager Henderson. Its shares rose above the offer price on hopes of a counterbid.