European stocks close sharply lower on US concerns

European stock markets closed sharply lower yesterday after investors found unwelcome holes in otherwise strong US corporate results, adding to fears the recovery from recession is stalling.

Dealers said US second quarter results were beating headline forecasts but on closer inspection, gains were often coming from cost cutting and lower bad debt rather than from increased business.

This was especially true of the banks, which were writing back large provisions made earlier to cover soured loans rather than building up new credit, they said.

News of a sharp fall in US consumer confidence then added to concerns that consumption is tailing off after last year's massive stimulus package, leaving the recovery at risk - and the markets over-valued.

In London, the FTSE 100 index of leading shares closed down one per cent at 5,158.85 points. In Paris, the CAC 40 tumbled 2.28 per cent to 3,500.16 points and in Frankfurt the DAX lost 1.77 per cent at 6,040.27 points.

Sharp falls on Wall Street added to the pressure on European markets in afternoon trade, with investors encouraged to take profits on recent gains as the grim news-flow continued.

In New York, the blue-chip Dow Jones Industrial Average was down 1.90 per cent at around 1600 GMT while the tech-heavy Nasdaq composite lost 2.21 per cent.

Dealers said results from key US companies such as Google, Bank of America, Citigroup and General Electric pointed to underlying weakness in consumer demand despite strong headline figures.

Weak inflation data was taken as a further sign of weak demand.

"The plethora of data and headlines ... is only adding another level of uncertainty as market participants attempt to digest conflicting views," said Kimberly DuBord, an analyst at Briefing.com.

Up to Thursday, the US market had chalked up substantial gains in a seven-day winning streak, increasing the temptation ahead of the weekend to take profits.

Dealers said the sharp and much bigger-than-expected fall in the University of Michigan consumer confidence reading to 66.5 in July from 76 in June hit the markets hard.

Waldemar Brun-Theremin of Turgot AM in Paris said "company results overall today were not too bad but the (fall) in consumer confidence is worrying, especially after recent weak US indicators.

"The figures ... are making investors wonder what is going on," he added. In London, IG Index said recent gains had lacked conviction and stocks looked vulnerable to further setbacks.

"At the moment, the future still looks fragile and it is difficult to see much real headway being made by stock markets in the short- to medium-term," the trading firm said in a commentary.

Elsewhere in Europe, Amsterdam shed 1.75 per cent, Brussels slumped 2.10 per cent, Madrid lost 1.66 per cent, Milan fell 1.56 per cent and Swiss stocks were down 1.70 per cent.