European stocks fall as banks slip and defensives gain

European shares fell marginally yesterday, with weak banking shares offsetting a rise in defensive sectors, and amid mixed signals for economic recovery.

The FTSEurofirst 300 index of top European shares fell 0.1 per cent to close at 862.41 points, having been as high as 870.47. The index is up 33.6 per cent from the lifetime low it hit on March 9.

The benchmark fell 2.5 per cent last Monday and some analysts say the rise has gone too far, relative to the tangible evidence of an economic recovery.

"We've had a surge in equities, on the basis that there will be a recovery, but that hasn't been borne out by the data so far," said Jeremy Batstone-Carr, strategist at Charles Stanley, in London.

"Benchmark indexes are struggling to break through key resistance levels, with the exception of the Nikkei in Japan."

US economic data was mixed yesterday.

New US housing starts and permits rebounded in May from record lows as ground-breaking for multifamily units surged after tumbling the prior month, a government report showed.

But industrial production slid a steeper-than-expected 1.1 per cent in May from the prior month with output off sharply at factories, utilities and mines, a Federal Reserve report showed.

Back in Europe, defensive stocks were the biggest gainers.

Tesco closed 1.5 per cent higher after the world's third-biggest retailer posted its best quarterly sales rise in Britain for two years and said it was closing the gap on recent stronger growth rates at its main domestic rivals.

Rival J Sainsbury rose 1.1 per cent, ahead of an update today.

Telecoms rose, including BT, up eight per cent after being upgraded by Morgan Stanley to "overweight". Vodafone finished 1.6 per cent higher.

Pharmaceuticals to rise included GlaxoSmithKline and Sanofi-Aventis, up 0.7 and 1.1 per cent respectively. Shares of NBG tumbled 10 per cent after Greece's largest lender said its board would convene this week to decide on a rights issue of up to €1.25 billion.

Other financial institutions retreated, trimming some of their recent strong gains. UBS, BNP Paribas, Société Générale and UniCredit lost between 2.3 and 4.1 per cent.

The European Central Bank said last Monday that eurozone banks would probably need to write down another $283 billion this year and next on bad loans and securities.

Across Europe, Britain's FTSE 100 rose 0.1 per cent, Germany's DAX was flat and France's CAC-40 fell 0.2 per cent.

"We're not out of the woods yet," said Batstone-Carr. "The data says there's a gigantic amount of spare capacity in the US economy."

German analyst and investor sentiment rose in June to its highest level since May 2006, a survey showed yesterday, but economists warned that Europe's largest economy remained in a tough spot.