European stocks drop one per cent

European stocks closed one per cent lower yesterday as investors cashed in on a nine-day winning streak, with banks among the top losers as takeover rumours faded.

LVMH led a fall in luxury goods stocks as investors dissected sales figures, and markets extended losses after US core producer prices for last month posted an unexpectedly strong 0.6 per cent gain.

The pan-European FTSEurofirst 300 index of 300 leading shares closed down 1.03 per cent or 14.92 points at 1,428.58, slipping from five-year highs and snapping its longest winning run since March.

The day's points fall was the worst in 17 sessions. The narrower DJ Euro Stoxx 50 dropped 1.3 per cent, and the wider DJ Stoxx 600 fell 1.1 per cent as Wall Street indexes slipped on the core PPI reading and a downgrade of Intel Corp.

Indexes showed little reaction, however, after the ZEW index of German investor sentiment reported a slump to a 13-year low after a sharper-than-expected fall this month.

European shares have recovered strongly from a sharp correction in May and June, and strategists say indexes are simply following typical seasonal variations, with the coming months set to remain bullish.

"The May setback reminded investors of the long-established seasonal pattern of equity markets. It shows that markets tend to weaken in spring after a strong start to the year and regain momentum in the autumn. The fourth quarter is, by some margin, the strongest in the year," said Max King, a global investment strategist at Investec Asset Management.

"Bullish investors may need to be patient. Most investors are naturally cautious and always willing to listen to any number of plausible reasons justifying inaction, however good the apparent value of markets. Sooner or later, though, the arguments of the pessimists will be exhausted and markets should deliver a powerful advance."

Germany's DAX fell 1.15 per cent, France's CAC 40 slipped 1.1 per cent and the UK's FTSE 100 lost one per cent, outperforming slightly thanks to a rise in oil majors BP and Royal Dutch Shell before an expected production cut by Opec.

Spain's Repsol bucked the sector's small upward move, dropping six per cent after Sacyr Vallehermoso said it would be happy with 10 per cent of the firm after buying five per cent on Monday. Newspapers had said it wanted 15 or 20 per cent.

Banking stocks slipped back from recent gains, with Barclays and Lloyds TSB down 2.5 per cent as market talk of interest from Citigroup died down, while the US bank reached a deal for a 20 per cent stake in Turkey's Akbank.

Other bank merger rumours also faded, and JPMorgan cut the Spanish retail bank sector to "underweight", hurting Banesto especially.

European banks trimmed losses following bullish earnings figures from US peer Merrill Lynch in mid-session, but they soon fell back again.

French luxury goods maker LVMH lost 2.4 per cent, and others in the sector were hit as investors focused on a disappointing performance in its wine and spirits and fashion and leather goods units despite an 11 per cent rise in nine-month sales.