European shares eased yesterday as a slide in oil stocks led by BP outweighed a rally in telecom shares sparked by Sonae launching a takeover bid for Portugal Telecom.

New York was in the red as the European day drew to a close, with the Dow Jones down 0.1 per cent, the Nasdaq 0.5 per cent lower and the S&P 500 0.4 per cent weaker.

In Europe the FTSEurofirst 300 index ended at 1,318.01 points, down 0.3 per cent on the day and some 1.5 per cent off the four-and-a-half year high of 1,337 hit last week.

"It's a normal, healthy, technical correction. The start of 2006 was too optimistic," said Philipp Musil, fund manager at Constantia Privatbank in Vienna.

Investment bank JP Morgan saw European stocks facing headwinds in the form of earnings disappointments, a stronger currency, the withdrawal of monetary support, derating multiples and the potential for an inflation pick-up.

European stocks trade currently at on average 13.3 times 2006 earnings compared with a price-earnings ratio of 15 times for the S&P 500, JP Morgan said in a research note.

"We do not find valuation multiples attractive in the context of these concerns," the bank said.

Morgan Stanley also forecast disappointing earnings growth in Europe due to margin pressures caused by higher capital expenditure, interest rates and input costs and a stronger euro.

BP, Europe's biggest oil producer, dropped 2.7 per cent after a 26-per cent surge in fourth-quarter replacement cost profit on the back of high oil prices missed forecasts due to refining results.

However, BP said that if oil prices are around $41 per barrel between this year and 2008, it would be able to distribute around $50 billion in dividends and buybacks over the period, and around $65 billion if the oil price was around $60 a barrel.