Fears over banks, economy pummel European stocks

European shares fell to their lowest close since mid-2006 yesterday as worries intensified that a credit crisis would lead to more losses at banks and cast a lengthening shadow over economies, hurting demand for metals.

The FTSEurofirst 300 index of top European shares ended 1.15 per cent lower at 1,254.76 points.

Banks and mining stocks took the most points off the pan-European index, with UBS falling four per cent, BNP Paribas 2.4 per cent and Credit Suisse 3.2 per cent.

The top three negative weights on the index were mining stocks Rio Tinto, BHP Billiton and Anglo American, which fell between four and six per cent, driven by a fall in copper prices.

"People are concerned at signs that the financial system is not repairing itself, and that earnings outside the financial sector are now going to get hurt," said John Haynes, strategist at Rensburg Sheppard Investment Management.

"Logically hedge funds should be the next victim and people who deal with hedge funds, the prime brokers, those who supply capital."

"Interest rate cuts are not enough - this is beginning to go beyond the Fed," he said.

The Federal Reserve is widely expected to cut interest rates by a further 75 basis points next week.

US stocks fell as traders cited talk that a Wall Street firm faced liquidity concerns, dragging down financial shares and adding to anxiety about the credit crisis.

Bear Stearns pared losses but was still down nine per cent in New York after Ace Greenberg, chairman of its executive committee said rumours of liquidity problems at the bank were "totally ridiculous".

While metals fell, oil rose to a record at $107.85 a barrel, lifting stock in BP, Shell and British Energy by 0.5-1.8 per cent but weighing on the overall market.

The euro weakened slightly to $1.5335. Analysts say that a combination of oil and the weak dollar could hurt equities already hammered by the credit crisis, by raising input costs intolerably and making exports uncompetitive.

And the cost of borrowing three month euro funds rose by more than five basis points to 4.55875 per cent, the highest in two months as deteriorating conditions in financial markets prompted banks to shell out more to get hold of cash. Across Europe, Britain's FTSE, France's CAC and Germany's DAX fell 1 to 1.2 per cent.

HSBC was the top positive weight on the pan-European index, gaining 1.5 per cent after reports the global bank would try to raise its stake in Bank of Communications, China's fifth-largest lender, beyond 20 per cent when regulations allow.

The chairman of BoCom told reporters the bank was talking to regulators about allowing HSBC to raise its stake to as much as 40 per cent but if the rules did not change, there was no way this would be achieved.

Spanish utility Iberdrola SA was up 1.2 per cent, as an election victory for the ruling Socialist Party fanned speculation sector consolidation would go through more smoothly, dealers said. Gas Natural jumped 3.7 per cent.

Iberdrola, Spain's top utility by market capitalisation, has been in play since it emerged that shareholder ACS had held talks with France's EDF on a break-up bid that would also include Union Fenosa, controlled by ACS.

The FTSEurofirst 300 has fallen by 16.7 per cent so far this year and is more than 20 per cent below last July's six-and-half year peaks as the deterioration in the credit markets has hit the financial sector particularly hard.

Volkswagen rose 1.7 per cent as Focus magazine reported, without citing sources, that Porsche plans eventually to raise its Volkswagen stake to 75 per cent in order to achieve a domination and profit transfer arrangement.

Porsche said it would not seek to raise the stake, but its shares fell 2.6 per cent.