European stocks take a beating on banking worries

European equity markets closed lower yesterday, tracking a fall in US shares on banking concerns as Merrill Lynch reported a bigger-than-expected write down for bad debts and Standard & Poor's cut its rating.

The pan-European FTSEuro first 300 index ended 0.5 per cent weaker at 1,549.7, near the day's low of 1,546.3.

The index is up more than four per cent so far this year but well short of the 14 per cent gain made by this time last year.

Banks were the largest negative weight on the FTSEurofirst yesterday, with HSBC, Santander, UBS and BBVA all down between one and two per cent.

"It's better to stay away from the banks, even after their recent slump," said Emmanuel Morano, head of equity management at La Francaise des Placements.

Standard & Poor's cut its rating on Merrill Lynch, the world's largest brokerage, prompting a fall in US bank stocks. Merrill earlier reported a $2.3 billion net loss for the third quarter, its first quarterly loss in six years.

Shares in Merrill Lynch were down 5.6 per cent.

Towards the close of European trading hours, US benchmark stock indexes were down between 1.1 and 2.3 per cent, while short-dated US Treasury yields fell to their lowest level in two years.

Stocks were also hit by data showing the US housing market took a sharp turn for the worse in September as prices tumbled and sales of previously owned homes fell to a record low.