European shares end down 1.5%

European shares lost ground yesterday but closed off intra-day lows as surprisingly strong US consumer confidence data took some of the edge off fears linked to swine flu and US banks' capital needs.

The FTSEurofirst 300 index of top European shares ended 1.5 per cent lower at 801.24 points, clawing back some earlier losses that saw the benchmark sink as much as 2.6 per cent.

The recovery came in the wake of data showing US consumer confidence rising in April to the highest level since November. Wall Street's leading indexes, which had opened lower, turned into positive territory, pulling Europe along.

"That was the trigger," said Giuseppe-Guido Amato, equities strategist at brokerage Lang & Schwarz.

"It is one small stone in the mosaic, another sign of a moderate stabilisation but it is by no means a sign of any distinct turnaround. We are not out of the woods yet," he said.

Tuesday's slide left the FTSEurofirst 300 index 22 per cent above this year's low point set on March 9 and Mr Amato said stock markets were showing resilience in the face of a potential swine flu pandemic, news of which hit financial markets on Monday.

"The market is range-bound but in an upward trend, showing underlying strength despite the swine flu," he said.

"Investors are aware that it (a potential pandemic) is a danger but the problem is that nobody knows... what is for sure is that we really don't need one, it could be a catastrophe for the market," Mr Amato added.

The World Health Organisation raised its alert level to Phase 4, indicating an increased risk of a pandemic.

Credit Suisse in a global equity strategy note drawing parallels with the 2003 Sars outbreak and avian flu, said stock markets could fall 10 per cent to 15 per cent "if concerns rose to Sars type levels, which we believe is very unlikely".

Goldman Sachs, too, saw scant effects for markets. "The impact will likely be relatively limited unless the source of concern extends meaningfully beyond Latin America," it said in a research note.

Banks sliced most points off the European benchmark index followed by mining and industrial engineering stocks, both latter sectors on fears that a swine flu outbreak might prolong the global recession.

Financials, which have had an even stronger run than the broader market since early March, sold off on news that US regulators are talking to Citigroup Inc about its capital levels after stress testing the bank, and a Wall Street Journal report that Bank of America Corp may need billions in fresh capital.

"It's not really a surprise. That some banks need to strengthen their capital base has been flagged by (Timothy) Geithner and (Ben) Bernanke," Mr Amato said, referring to the US Treasury Secretary and Federal Reserve Chairman, respectively.

"It shows that the problems are not out of the way yet," he said.

The importance of the US bank stress tests was underscored by fund management company Garmignac Gestion, which said in a strategy note: "The (stock) markets will not be able to pick up without a prior recovery of the (US) banks".

In Europe yesterday Deutsche Bank's shares fell 6.9 per cent although Germany's biggest bank reported stronger than expected first-quarter earnings as debt trading windfall profits offset a loss in its wealth management arm and a retail banking profit dip.

BBVA dipped 2.1 per cent - outperforming the DJ Stoxx banks index, which lost 2.6 per cent - after Spain's second-largest bank unveiled a 14 per cent dip in net profit in the first three months of the year as bad loans rose.

"Some banks appear to have returned to sustainable profitability while some have yet to move through their losses," Fox-Pitt Kelton said in a European banks research note.

"This makes the disparities between stocks as wide as they can be and will be a critical investment theme over the coming year," Fox-Pitt Kelton added.

Among miners, Rio Tinto fell 6.3 per cent and Anglo American ended down 5.6 per cent. Copper prices remained near three-week lows and gold fell below $900.

Steelmaker ArcelorMittal dropped 6.1 per cent and engineering group ABB fell 5.1 per cent.