Nagging doubts about earnings growth prospects put the skids under European shares yesterday, with tech issues SAP and STMicroelectronics hit most, despite reporting solid quarterly numbers.
There was also weakness among banks after Merrill Lynch downgraded earnings forecasts for UBS and Credit Suisse, but Abbey National bucked the sector's trend to gain 2.8 per cent amid new market talk of a possible takeover bid for Britain's second-biggest mortgage lender.
The FTSE Eurotop 300 index of pan-European blue chips shed 1.51 per cent to end at 963.42, its lowest close since May 17 and trimming 2004 gains to barely 0.6 per cent.
The narrower DJ Euro Stoxx 50 index fell 1.8 per cent to 2,680.44.
Investors looked past what has been so far a solid second-quarter reporting period, worrying instead over the sustainability of earnings growth in the future after several consecutive quarters of strong profit rises.
"Sentiment has weakened slightly during this reporting season, some investors are not convinced that companies' earnings guidance is enough to justify forward valuations," said Carsten Roemheld, a global fund manager at Cominvest AM who helps manage about €800 million.
Some strategists said valuation worries were particularly acute among technology issues after some stocks widely outperformed the rest of the market in recent months.
But other market watchers such as Ian Scott, chief European strategist at Lehman Brothers, said market valuations elsewhere remained cheap enough to compensate for a slower growth environment.
The prospects of new interest rate hikes in Britain and the United States also capped sentiment after the publication of surprisingly strong British retail sales for June and a sharper-than-expected fall in last week's US jobless claims.
Around Europe, the FTSE 100 was 1.6 per cent lower, with the DAX shed 1.97 per cent and the CAC 40 fell 1.8 per cent, while the Swiss blue chip index was 1.5 per cent weaker.
Shares in SAP shed 3.7 per cent after the world's biggest maker of business software showed long-awaited signs of a European recovery and strong US growth, but disappointed some investors by failing to raise full-year guidance.
French-Italian chip maker STMicroelectronics also shed 3.1 per cent, despite forecasting a 14-per cent rise in global chip sales in 2005, near the top of market expectations. French broker CAI Cheuvreux pointed at a disappointing third-quarter gross margin target.