European shares drop as ECB refuels recession worries

European shares dropped yesterday, led lower by financials, after ECB forecasts showed the euro zone economy could shrink by more than three per cent this year, reigniting fears over the global recession.

The FTSEurofirst 300 index closed down 3.7 per cent at 670.72 points, almost wiping out Wednesday's gains. The index has lost more than 19 per cent so far this year, after plunging 45 per cent in 2008.

Across Europe, the FTSE 100 index was down 3.2 per cent, Germany's DAX was five per cent lower and France's CAC 40 was down four per cent.

On Wednesday the index gained four per cent on hopes of an economic recovery in China. It hit a lifetime closing low on Tuesday.

"What we see today is a sobering of the markets," said Hans-Juergen Delp, equity market strategist at Commerzbank in Frankfurt.

"Yesterday, we had euphoria that was solely due to China, but this can't be the cure to the crisis. The ECB's projection about the European economy is nothing more than blank realism."

Both the European Central Bank and the Bank of England cut lending rates yesterday in line with expectations to record lows and staff economists at the ECB were gloomy about the outlook for the 16-nation euro zone, expecting a much sharper contraction this year than previously and only tentative recovery in 2010. Financial stocks were down heavily, with the DJ Stoxx European insurers index and DJ Stoxx European banks index being the two top sectoral decliners.

Axa, Old Mutual, BNP Paribas and Deutsche Bank were down between 7.1 and 13.1 per cent.

British Life insurer Aviva plunged 33.4 per cent as analysts cited concerns over the company's capital strength after the group said it will maintain its dividend.

Along with cutting its key rate to a record low of 0.5 per cent the Bank of England's Monetary Policy Committee said it would buy £75 billion of assets to bolster up the British economy.