European stocks slumped yesterday, hitting their lowest close since March 17, amid ongoing worries about the financial industry, high oil prices and rising inflation.
Dutch-Belgian financial group Fortis fell 4.8 per cent, British mortgage lender HBOS lost 4.2 per cent, Swiss UBS shed 3.3 per cent and Germany's Deutsche Bank dropped 3.1 per cent.
The FTSEurofirst 300 index of top European shares closed 1.6 per cent lower at 1,224.50 points. It lost 3.4 per cent over the week.
Erste Bank attributed the slide to high oil prices, persistent uncertainty stemming from the financial crisis, the strong euro and high inflation.
"Unless these essential parameters change, we expect a continued weak stock market performance," Erste said in a note.
US stocks also fell sharply yesterday as financial shares slid after several brokerages warned of the likelihood of more dividend cuts and mortgage-related write-downs at US banks.
A spike in crude oil prices, after tumbling 3.5 per cent on Thursday, added to investor jitters about inflation and consumer spending. All the major indexes fell more than one per cent.
Investors dumped commercial bank shares after Merrill Lynch said it sees dividend cuts at Bank of America, Regions Financial, SunTrust Banks and Wachovia.
Shares of Merrill and other investment banks also took a hit as rumours circulated among traders that Merrill may give a profit warning and take additional write-downs on its mortgage holdings.
Merrill's stock fell 3.5 per cent to $36.38.
"Couple oil with all the financial concerns coming back to light and you have all the fixings for a down day," said Edward Bretschger, director of equity sales and trading at Calyon Securities in New York.
The Dow Jones industrial average fell 137.44 points, or 1.14 per cent, to 11,925.65. The Standard & Poor's 500 Index slipped 16.28 points, or 1.21 per cent, to 1,326.55. The Nasdaq Composite Index dropped 45.72 points, or 1.86 per cent, to 2,416.34.
The rumours on Merrill dragged on other investment banks, with Lehman Brothers Holdings Inc. shares down 2.7 per cent to $23.79 and Morgan Stanley shares down 2.9 per cent to $39.03.
In addition, two Wall Street investment banks cut their earnings estimates for the current quarter on home finance companies Fannie Mae and Freddie Mac, citing persistent erosion in US housing and mortgage credit.
Shares of Fannie Mae, the No. 1 mortgage finance company, lost 3.9 per cent to $24.02, while shares of Freddie Mac slumped 5.5 per cent to $22.35.
Short sellers targeted financial stocks in particular.
Short interest in both Washington Mutual, the largest US savings and loan, and top insurer American International Group climbed more than 23 per cent. Short interest in shares of Switzerland's UBS nearly doubled.
AIG shares declined 1.7 per cent to $32.51 on the New York Stock Exchange. Washington Mutual stock was down 0.5 per cent at $6.32.
Among bank shares, SunTrust lost 2.3 per cent to $34.50, and Wachovia shed 2.3 to $17.37, while Regions Financial rose 2.2 per cent to $11.42 and all in NYSE trading.
Shares of Yahoo Inc fell more than three per cent as reports of a brain drain raised fresh worries about the future of the web company after it chose to partner with Google Inc instead of Microsoft Corp.
The price of oil rose more than two per cent, buoyed by China's decision to raise fuel prices and nervousness over tensions between Israel and Iran.