European shares end down on ECB inflation concerns

European shares fell for a second day yesterday as investors anticipated possible inflation warnings from the European Central Bank after Federal Reserve chairman Ben Bernanke said US price pressures may linger.

Low-cost airline Ryanair posted the largest daily fall, shedding eight per cent after forecasting a drop in profit growth that hit the entire airline sector.

Mr Bernanke said there was a risk that elevated levels of core inflation might not recede just yet, which stripped 0.4 per cent off US blue-chip stocks as investors all but ruled out a stocks-friendly rate cut this year.

The pan-European FTSEurofirst 300 index of leading European shares ended down 0.62 per cent at 1,612.13 points, but the market is still showing a near nine per cent gain on the year.

"We're only back to where we were on Friday," said David Jones, chief market analyst at CMC Markets.

"What's not helping, obviously, is the US market under pressure and the Dow flirting with the 13,600 level. If we see the Dow below there, we could see a bigger sell-off in the European markets," he said.

The Dow Jones Industrial Average was last at 13,630.70, down 0.3 per cent on the day and retreating from this week's all-time high at 13,692.00.

Ryanair, Europe's largest low-cost airline, reported a 33 per cent rise in annual net profit yesterday, but forecast a five per cent drop in profit growth in the year ahead.

Shares in rival budget airline EasyJet shed 6.75 per cent, Air France fell nearly four per cent, while British Airways shed over two per cent.

"It's just a general twitchiness because of Ryanair's outlook, because Ryanair has performed so well from a share price point of view... If they warn they'll actually see a big downturn in growth, that will hit (the sector)," Mr Jones said.

Bank stocks were the biggest drag on the broader market, and eurozone government bond yields rose to their highest in five and a half years, as investors braced for possible inflation warnings from ECB president Jean Claude Trichet today.

Allied Irish shed nearly three per cent, while BNP Paribas fell 1.7 per cent.

"The ECB's rate hike is already priced in, and the focus will be on the bank's tone following the meeting," said Christophe Donay, strategist at Kepler Equities, in Paris.

If the bank adopts a hawkish tone on inflation, Mr Donay said, the stock market could react negatively.

"But I don't expect that to happen. Inflation is not accelerating in Europe."

Around Europe, London's FTSE 100 index fell 0.47 per cent, while Frankfurt's DAX dropped 0.71 per cent, and France's CAC 40 fell 0.77 per cent.

Analysts said stock valuations in Europe had gone up too much for equities to remain a good bet, with interest-rate increases lurking.

Morgan Stanley strategist Teun Draaisma said the outlook for shares in the next six months was not very good, and interest rates posed the biggest threat.

"The mid-cycle slowdown, during which growth slows and rates go lower, is over. US 10-year bond yields are approaching five per cent, which is dangerous, and valuations in Europe are too expensive," he said.

"What we're saying is: Take profits on your equity overweights and go back to neutral. Stay in cash and underweight on bonds."

Among gainers was Britain's United Utilities which rose 3.5 per cent after putting its electricity distribution assets up for sale and posted strong results.

German mid-cap drug company Merck KgaA rose 5.6 percent after optimistic results from a cancer drug trial and expectations it will replace Altana in the blue-chip DAX.

Commerzbank rose 0.7 per cent to hit seven-year highs on market talk Citigroup could launch a bid for the German bank. Commerzbank declined comment.