European stocks fall as banks overshadow miners

European stocks inched lower yesterday, ending the quarter with a 3.4 per cent loss, as bank stocks fell amid signs credit was still tight, overshadowing a rally in mining shares.

Banking shares were among the biggest losers, with HSBC dropping 0.9 per cent, Societe Generale falling 2.1 per cent and Barclays slipping 1.3 per cent.

A lack of liquidity on inter-bank markets on both sides of the Atlantic and difficulties for some smaller banks trying to raise short-term funds offset optimism earlier in the week about international bond markets opening up for specific borrowers.

"Markets hate uncertainty, and we still don't know who, among banks, is exposed to the turmoil," said Pierre Sabatier, strategist at Factset, in Paris.

The FTSEurofirst 300 index of top European shares closed 0.04 per cent lower at 1,550.89 points.

Europe's benchmark index finished the third quarter with a loss of 3.4 per cent, its first quarterly loss since the second quarter of last year.

The index, which closed September with a gain of one per cent, is up 4.5 per cent so far this year, compared with a gain of 9.5 per cent over the first nine months of 2006.

Fears that a debacle in the US sub-prime mortgage market would hit banks' profits and spread to the broader economy have triggered a sharp retreat on equity markets over the past months.

German lender IKB, one of the first big European casualties of the crisis in the credit market, yesterday repeated its full-year loss could reach almost $1 billion. IKB's stock, which has plummeted over the past weeks, ended up 0.7 per cent. British mortgage lender Northern Rock sank 7.4 per cent following reports it had borrowed a further £5 billion from the Bank of England. Also on the downside, Tate & Lyle Plc plunged 28 per cent after the British sugar and sweetener maker warned on its outlook.

Merck KGaA tumbled six per cent on concerns over rising competition in its lucrative liquid crystals business and after Deutsche Bank downgraded the stock to "hold" from "buy".

Around Europe, the UK's FTSE 100 index ended down 0.3 per cent, Germany's DAX index up 0.1 per cent and France's CAC 40 dropped 0.3 per cent.

On the upside, miners gained ground along with copper and gold prices. Rio Tinto gained 1.7 per cent.

Telecoms equipment maker Alcatel-Lucent rose 4.4 per cent after a report in the Financial Times said the company's board has given chief executive officer Patricia Russo one month to produce an emergency restructuring plan.

Investors are now preparing for guidance on the impact of the turmoil in the credit markets on the broader economy when both the Bank of England and the European Central Bank hold their policy-setting meetings next week.

"The markets are in convalescent mode. They feel the central banks are on the case and trying to ensure that what we've had is, as far as possible, limited to being a financial crisis and doesn't ramify anything for the economy," said Andrew Bell, European strategist at Rensburg Sheppards Investment Management.