European shares started the fourth quarter on a slightly weak note yesterday, with a plunge in online gaming stocks offsetting gains in resource and utility companies.

PartyGaming shares dropped 58 per cent and other gamers were equally hit after the US Congress passed legislation to end Internet gambling there.

The pan-European FTSEurofirst 300 index closed down 0.01 per cent at 1,396.26 points after having earlier risen to 1,402.90, just shy of a five-year high of 1,407.5 in May.

The benchmark added six per cent in the third quarter and is up about 10 per cent so far this year.

Despite the lukewarm start to the quarter, strategists say European equities are well placed as leading US economic indicators prove supportive.

"Today markets are cheap, we believe. Even if we are heading for a recession, which we don't think, you should still be bullish on equities," Morgan Stanley strategists said in a note.

"We believe the US economy is headed for a soft landing, underpinning our upbeat outlook for European equities." The performance of markets in 2006 has parallels to 1995, when equities rallied even while leading indicators fell, growth slowed and the Federal Reserve kept interest rates on hold, they added.

The Institute for Supply Management's September manufacturing index, the latest US economic data, was slightly weaker than expected and supported views the US economy was continuing to slow and that the Fed would keep rates on hold.

A busy economic week is scheduled, with the European Central Bank widely expected to raise rates to 3.25 per cent on Thursday and the monthly US job report due on Friday.

Around Europe, Paris's CAC 40 lost 0.13 per cent and Frankfurt's DAX slipped 0.08 per cent, while London's FTSE 100 dipped 0.05 per cent with resource stocks offering support after gold and base metal prices firmed.