European share indexes retreated from 33-month highs to close lower yesterday as oil prices rose and the euro hit a two-and-a-half month high, with Sanofi-Aventis down after disappointing news on a key drug.

Sanofi closed down 2.3 per cent at €62.80 after a company-sponsored study showed that patients in the second year of a trial on its experimental obesity drug Acomplia regained some of the weight they had lost.

The FTSEurofirst 300 index of pan-European blue chips closed 0.6 per cent weaker at 1,100.6 points, while the narrower DJ Euro Stoxx 50 index closed at 3,097.3 points, also down 0.6 per cent.

The indexes climbed to their highest levels since mid-2002 this month, buoyed by impressive profit growth and a resurgent global economy.

"We still feel reasonably comfortable, but like a lot of people, we are beginning to question how far it can go," said Keith Wade, chief economist at fund manager Schroders, adding that strong liquidity was a positive factor for markets.

"The corporate sector has a big cash surplus it has built up over a few years of retrenchment, and that money is beginning to find its way into the stock market now through the takeover activity we are seeing."

Companies returning money to shareholders and an expected pick-up in capital spending should keep stocks supported, Mr Wade said.

UBS is still positive on equities, preferring Europe and Japan over the UK and the US, but is sounding a note of caution after the recent gains.

"We're a bit concerned that profitability seems to be extraordinarily high globally at a time when real interest rates are still extraordinarily low," said Ian McLennan, an equity strategist at UBS in London.

"As long as that continues, risk appetite will remain high, but if we get any jitters on profitability, or more likely, some jitters on real interest rates, then you lose momentum in the equity market."

The threat of continued high energy costs rattled markets as crude oil climbed to almost $55 a barrel, within reach of the highs it hit in October last year.

Also weighing on sentiment was a firmer euro, which rose to $1.3350 against the dollar, its highest since early January. A firmer euro hits the earnings of multinational companies that report in euros and makes European exporters less competitive.

In New York, the blue-chip Dow Jones industrial average was 0.1 per cent weaker at 10,927 points, while the Nasdaq Composite Index shed 0.5 per cent to 2,080.5 points by 1710 GMT.

Around Europe, London's FTSE 100 closed 0.3 per cent weaker, while Paris's CAC-40 and Zurich's SMI both fell 0.6 per cent. Frankfurt's DAX closed 0.7 per cent softer.

Shares in automaker Volkswagen retreated 2.6 per cent to €36.38 after the company said first-quarter operating profits "will not be satisfactory".

"The (VW) outlook for the first quarter was not inspiring. VW is a turnaround story on wobbly legs," said one Frankfurt trader.

Things were better elsewhere in the auto sector, with French car parts maker Valeo 2.3 per cent higher after it outlined a €250 million share buy-back plan, and Renault up 0.7 per cent after selling its 18 per cent stake in Japanese heavy truck maker Nissan Diesel Motor Co.

Also firmer was British Airways, up 1.6 per cent after announcing that well-regarded former Aer Lingus executive Willie Walsh would take over as chief executive when Rod Eddington retires in September.

Techs struggled after US mobile phone chip maker Texas Instruments trimmed its quarterly profit forecast on Monday as its emerging big-screen television chip business hit a wall.

European peer STMicroelectronics edged down 1.5 per cent, while chip equipment maker ASML fell 3.1 per cent after CSFB cut its rating on the stock to "neutral" from "buy".