European stocks ended a strong quarter on a cautious note yesterday before an anticipated hike in US interest rates, but takeover talk around Britain's 02 boosted telecoms for the third straight day.

Among big losers, Swiss engineering group ABB fell six per cent after it warned of lower second-quarter profit and cut its 2005 margin targets as it launched a $240 million four-year restructuring programme.

The pan-European FTSEurofirst 300 index closed 0.2 per cent off at 1,141.4 points, but was still up five per cent in the quarter.

Financial markets expect the Federal Reserve to raise borrowing costs by a quarter percentage point, making it the ninth straight 25-basis-point increase since last June.

Markets are on alert for what the Fed might indicate about future increases and its inflation outlook.

"We expect two more hikes this year. So far as the markets think the Fed is going to change quickly, they might be disappointed," said David Bowers, chief European and global strategist at Merrill Lynch.

"People have become optimistic that we are very close to the turning point for the Fed. I think that may come well into the slowdown."

US stocks were flat by the close of European trading and supported by news that Bank of America Corp plans to buy credit-card provider MBNA Corp for about $35 billion.

The FTSEurofirst 300 index has risen five per cent in the quarter and has gained nearly 10 per cent so far this year, led by an improvement in corporate-earnings growth.

The index hit a three-year peak of 1,151.7 points last week, capping a volatile quarter which saw it rally from a three-month low to a three-year high over the past two months.

"My concern is that people haven't focused on the dark side, and the dark side is whenever you get a collapse in inflation expectations, it's usually associated with a collapse in earnings growth," said Mr Bowers.