Europe stocks end down as credit worries return

European shares snapped a seven-day rally to end lower yesterday as concern resurfaced about the impact of the current environment of tight liquidity and high volatility on the corporate sector.

A series of newspaper reports suggested some investment houses, including Barclays, faced millions of dollars in exposure to asset-backed securities, stoking more uncertainty over the spread of the crisis in the US mortgage sector.

Bank shares led European stocks lower for most of the day, with BNP Paribas losing 3.4 per cent, Barclays dropping 3.6 per cent and HSBC falling 1.9 per cent.

The FTSEurofirst 300 index of top European shares ended down 1.7 per cent at 1,490.25 points, having erased almost all of this year's gains, but was still about four per cent above the eight-month lows struck on August 17.

"I don't think there is anything like the anxiety there was a couple of weeks ago, but there are still a lot of people needing to de-leverage their portfolios," said Andrew Bell, a strategist at Rensburg Sheppards Investment Management.

"After a couple hundred points (up), you start looking around for things that might be taken as an excuse for a bit of a mark-down," he said, adding: "The market's got a bad dose of croup, and it's going to take more than a couple of days in the sanatorium to sort it out."

Barclays denied a newspaper report yesterday that failed debt vehicles structured by its investment banking arm had left it with hundreds of millions of dollars' worth of exposure.

Another newspaper reported top institutional money manager State Street Corp faced $22 billion in exposure to asset-backed commercial paper programmes.

The company said in a statement its commercial paper continues to be sold daily. Meanwhile, Merrill Lynch downgraded US investment banks Bear Stearns, Citigroup and Lehman Brothers.

Banks were the biggest drag on London's FTSE 100, which fell 1.9 per cent, and on Paris's CAC 40, which fell 2.1 per cent. Frankfurt's DAX shed 0.7 per cent.

Adding to the pressure on equities was data showing US consumers in August were at their least confident for a year, and house prices across the US fell by more than three per cent in the second quarter, while German business confidence worsened.

The FTSEurofirst 300 has fallen by nine per cent since the 2007 high seen in mid-last month as the deterioration in the US mortgage sector has unleashed a widespread evaporation of liquidity and a spike in financial market volatility.

"What we have here is a phase where the markets are attempting to find a level around which they can stabilise. They are going to remain a bit touchy and sensitive to the slightest bit of bad news or the slightest bit of good news," said Mike Lenhoff, chief strategist and head of research at Brewin Dolphin Securities in London.

Deutsche Post tumbled three per cent after Goldman Sachs added the stock to its "conviction sell list", downgrading the German mail and logistics group to "sell" from "buy" and slashing its price target to €18 from €24.

Among the few gainers in Europe were shares in London Stock Exchange, which rose 2.4 per cent after a person familiar with the matter said NYSE Euronext and Australia's ASX Ltd may be interested in buying part of Nasdaq Stock Market Inc's 31 per cent stake in the bourse operator.

Shares in French utility Suez ended the day roughly flat after the company said it was talking with President Nicolas Sarkozy's office to try to break an impasse on its merger with Gaz de France.