European investors slammed the brakes on a five-day rally yesterday to watch US-led forces finally launch a war on Iraq, and anxiously wait for clues as to how long the conflict will last.
Insurers led the downdraft as Germany's Allianz and Munich Re revealed how the long bear market in stocks has shrunk their asset bases, forcing both to go cap in hand to the market for billions of euros.
Some investors turned to drink, drugs and food stocks for safety, to lift food leader Nestle, Swiss drug group Novartis, and UK drinks firm Diageo.
By 1630 GMT, the FTSE Eurotop 300 index was down 0.6 per cent at 786 points, after rising 15 per cent in the past five sessions from a six-year trough on hopes for a rapid conclusion to the long-flagged conflict.
"We've had a sharp rally already and the market is jumping the gun a little bit, but it all depends how things go in the short term, and what's happened so far has been fairly subdued," said Richard Champion, a fund manager at Pavilion Asset Management.
Declining issues outpaced advancers by a margin of more than two-to-one in moderate volume.
There is room for a further rally if it became clear that war would be swiftly concluded, analysts said, but they doubted if rickety economic fundamentals could support a significant advance from current levels.
"It is our belief that the market will rally further because we subscribe to the view that will be a short war, but then we probably need some consolidation, and maybe even some weakness," said Nigel Cobby, managing director of European equities at J.P. Morgan in London.
London oil prices rebounded on unconfirmed reports that oilfields were on fire outside Basra in southern Iraq.
"If we get indications that it's going very quickly and there is very little damage to oil infrastructure, then perhaps there is room for a rally, but there are signs of headwinds in front of us to put back any meaningful resumption of growth," Champion said.
The DJ Euro Stoxx 50 index shed 1.5 per cent to 2,153 points. On Wall Street, the Dow Jones industrial average was down 0.6 per cent at 8,216 points, while the Nasdaq Composite shed 0.65 per cent to 1,388 points.
Nervousness in share trading continues to climb, with Germany's VDAX index of volatility up 7.5 per cent on the week though still below recent record highs.
The US-led forces launched dawn strikes on Baghdad yesterday with "selected targets" hit, but US officials said an all-out air and ground onslaught might be days away.
Allianz shares fell 10 per cent to 58.27 euros on plans for a deeply-discounted five billion euro rights issue.
Europe's biggest insurer had repeatedly scotched talk in recent months it would have to raise fresh cash, and analysts questioned the company's timing when a war was unfolding in Iraq.
"It's a very tricky time to be doing a thing like this and it shows how desperate they are," a London-based fund manager said.
Domestic rival, Munich Re sank 7.4 per cent to 75.81 euros on news it would issue bonds to strengthen its capital based, but another denial of any rights issue like Allianz left some analysts unconvinced.
"We think there's still a risk there could be a capital issue from Munich Re," said Marc Thiele, an analyst at Commerzbank Securities.
Elsewhere in the sector, Dutch insurer Aegon dropped 6.5 per cent to 7.4 euros as investors digested news of its plan to boost the rights of ordinary shareholders, stopping short of removing a key defence to hostile takeovers.
French insurer Axa fell 4.8 per cent to 11.7 euros, while Swiss Re shed 5.7 per cent to 66 Swiss francs and UK's Prudential fell three per cent to 337 pence.
Richemont, the world's second largest luxury goods group, sank seven per cent to 20.75 Swiss francs after warning that operating profit could fall by up to 40 per cent as gloomier consumers think twice before buying its glitzy Cartier watches or chic Montblanc pens.
Richemont's warning sent a chill through the luxury goods sector, with fashion watchmaker Swatch Group down 2.8 per cent at 110.75 Swiss francs, while France's champagne to handbags group LVMH dropped 3.6 per cent to 40.70 euros.
The basic producer sector was hit by a slide in Finnish paper group UPM-Kymmene, whose shares fell 6.5 per cent to 13.35 euros after news of the company's bonus issue which doubled the number of shares.
There was no guarantee that a swift victory for the United States would lead to a sustained recovery for stocks, economists said.
"It is a leap of faith for investors to conclude that American military supremacy will lead to the 'perfect victory' - an outcome which can be seamlessly translated into economic and financial market vigour," Morgan Stanley investment bank's economist Stephen Roach said in a note to clients.
"That leaves me in the uncomfortable place of worrying that we may be too fixated on the immediacy of the battle and too dismissive of the tough fundamentals that linger."