European shares fell steeply yesterday as mounting political uncertainty in major euro debtor countries prompted investors to lock in profits on indexes trading close to multi-year highs.

The FTSEurofirst 300 ended down 1.5 per cent at 1,150.91 points, its lowest close since December 31, having hit a near two-year peak of 1,178.55 points towards the end of January in a rally that raised it nearly eight per cent above a November trough. The eurozone’s blue-chip Euro STOXX 50, meanwhile, fell 3.1 per cent to 2,625.17, erasing all of its gains for the year.

A corruption scandal in Spain and polls showing Italy’s former prime minister Silvio Berlusconi regaining ground before elections this month triggered fresh concern over potential threats to eurozone stability and growth.

That pushed peripheral bond yields higher and prompted some heavy profit taking on euro zone banks, down five per cent, Spain’s IBEX, off 3.8 per cent, and Italy’s FTSE MIB , down 4.5 per cent.

Yves Maillot, head of European equities at Natixis Asset Management, which has €286.5 billion of assets under management, said the fall should be viewed as a pause rather than the start of a serious sell-off.

“For many weeks now we’ve had very positive performances so that’s the reason why we maybe need a correction in the very short term,” he said.

Suggesting there is still a lot of demand, equity funds attracted another $18.7 billion during the final week of January, fuelling talk of a long-awaited ‘great rotation’ out of fixed income and into stocks, EPFR Global said.

Jonathan Stubbs, European equity strategist at Citi, said that over the next two years, he would expect the first proper bull market in equities since the mid to late 1990s.

“To get a proper bull market in equities you need to see... growth coming through, you need a re-rating and you need inflows. As we look out to the next one to two years we think all of those ingredients will be in place,” he said.

Commerzbank was second-biggest faller on the FTSEurofirst 300 index, down 5.9 per cent in brisk trade, after it posted a larger than expected quarterly loss.

Trading volume in Commerzbank stood at more than twice its 90-day daily average.

“We’re well overdue a bit of a sell-off... you’ve also got some very disappointing results from Commerzbank this morning which have basically fed into the banking sector,” Michael Hewson, senior markets analyst at CMC Markets, said.

European auto stocks also came under pressure, off 3.2 per cent after gains left investors such as Citi and HSBC sifting through the sector for companies that still offer some value.

The auto sector was the best performer in Europe in 2012, surging 38 per cent, and since September it has rallied around 20 per cent, despite continued earnings per share downgrades.

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