European shares close lower by 1.6 per cent

European shares closed lower yesterday, led by Royal Bank of Scotland, which dragged down the European banking sector after it said it would report a 2008 loss of up to £28 billion (€31.488 billion) for 2008.

The FTSEurofirst 300 index of top European shares closed down 1.6 per cent to 791.23 points, the benchmark's lowest close since November 21, according to Reuters data, after it had briefly been down three per cent.

Banks took the most points off the index and were the heaviest sectoral loser. Royal Bank of Scotland plunged 64.3 per cent and nearly lost two thirds of its value during today's session, after it announced what would be the biggest loss in British corporate history.

More than 740 million shares in the company changed hands yesterday, more than nine times as much as the daily average in the past 30 trading days.

"We started out with a bit of optimism, but then the news about RBS came in and the banks issue was back at the centre of attention," said Commerzbank strategist Hans-Juergen Delp.

"The worst is yet to come," he added.

Mr Delp added that it would take some time before markets would be through the financial crisis, saying that more disappointing bank results are looming.

Also in financials, BNP Paribas, Deutsche Bank and Lloyds were all down between 5.7 and 33.9 per cent.

The DJ Stoxx banks index was the top sectoral loser, down 8.2 per cent.

Around Europe, UK's FTSE 100 index dropped 0.9 per cent, Germany's DAX index fell 1.2 per cent, and France's CAC 40 was down 0.9 per cent.

Banks also suffered from a lack of detail about the second rescue package by the British government, including the government increasing its stake in Royal Bank of Scotland.

Under the programme, banks will be able to insure themselves against losses on their riskiest assets.

"Without a bad bank there is no way out of this," said Giuseppe-Guido Amato, strategist at Lang & Schwarz in Germany.

"And we need three of them: one in the United States, one in the United Kingdom and one in Germany," he added, reflecting market disappointment that the UK government responded to RBS's problems by helping the company instead of creating a "bad bank" to deal with the broader sector's problems.

Pharmaceuticals and biotechnology stocks added most points to the index and the DJ Stoxx healthcare index was the second-biggest sectoral gainer, up 1.1 per cent.

GlaxoSmithKline was the top gainer, up 3.5 per cent.

Telecoms were up, with Deutsche Telekom rising 2.5 per cent, while UK peer Vodafone added 1.2 per cent. Vodafone's Chief Executive Vittorio Colao said the company will strive for strong cash generation and continue to invest in its "jewel" Indian operations in its battle against the global economic crisis.

US markets were closed yesterday for a national holiday.