European shares fell yesterday as the rally to six-week highs buckled under profit-taking in Ericsson and Zurich Financial.
That reflected a wider doubt over the recent upturn's lifespan as economic recovery falters, although some strategists said valuations were attractive enough to generate more gains.
"The valuation levels have got to about as good as they have been in five years," said Peter Sullivan, European strategist at Goldman Sachs, adding that a further advance was likely.
By 1537 GMT, with only Frankfurt still officially trading, the FTSE Eurotop 300 index was down 1.3 per cent at 991 points, though still 2.3 per cent ahead for the week.
Chipmakers like Philips and Infineon were under the cosh on worries about their product prices.
ABB, Europe's biggest engineering group, jumped 15.5 per cent on expectation it will sell its leasing portfolio next week to cut debt.
A pullback on Wall Street where fresh probes rekindled worries over corporate governance, also took the steam out of Europe's 20 per cent advance in recent weeks from its intraday five-year low of July 24.
Investors doubt if economic recovery will be strong enough to boost profits and extend the market's revival. Trading thinned by holidaying investors can be misleading, too, fund managers said.
"We won't get a proper feel until traders come back from their (summer) holidays," said Dublin-based European fund manager Des Flood of Hibernian Investment Managers, qualifying his belief that the market has limited upside due to the weak economic backdrop.
"The consensus is that this rally is not sustainable - but the consensus can often be wrong and that is the dilemma."
After its recent rally, the Eurotop 300 is struggling to push decisively above 998 points, its post-September 11 closing low. The index is poised to end 2002 down for the third year in a row, strategists said.
The Euro Stoxx 50 index of euro zone blue chips shed 1.7 per cent to 2,821 points.
On Wall Street, which ended at seven-week highs on Thursday, the Dow Jones industrial average was off 1.5 per cent at 8,910 points, while the tech-laden Nasdaq Composite was off two per cent at 1,393 points.
The pullback yesterday was led by many of the stocks that had rallied over several sessions earlier in the week, including Ericsson, Zurich Financial, French insurer Axa, and media leader Vivendi Universal.
The world's biggest maker of telecom equipment hardware, Ericsson, fell 16.5 per cent after rocketing by 67 per cent in the previous three sessions from 10-year lows.
Traders said the startling rally was due to extensive short-covering after the ability of hedge funds to sell the stock short was severely restricted.
That process was probably now over, one Swedish dealer said, while another said the market for short-selling Ericsson by borrowing the stock first from existing shareholders was open for business.
Loss-making Ericsson is in the middle of a rights issue worth 30 billion Swedish crowns, which it wants to use to repay its debt and restructure its finances amid a slump in demand for its products.
Axa, which reported good earnings earlier in the week, shed six per cent, while Swiss rival Zurich Financial, which had risen sharply on the back of takeover talk, fell 7.2 per cent.
Vivendi Universal dropped three per cent but is nearly 40 per cent higher on the week as investors felt more reassured the heavily-indebted group will avoid a cash crunch by selling assets.
The chip sector came under pressure after a duo of Taiwanese peers slashed their profit targets in response to ailing chip prices.
Dutch chip equipment maker ASML and electronics group Philips slid 9.8 percent and 3.3 per cent respectively. German chip group Infineon dropped 5.7 per cent, while Franco-Italian STMicroelectronics shed 5.4 per cent.
The day's economic news inspired little confidence while the earnings season wound down.
Belgium's leading economic indicator, a business outlook survey that is seen as a bellwether for the wider euro zone economy, fell 6.6 in August, its third monthly drop in a row, though in line with expectations.
Britain's economic growth rate for the second quarter was revised down sharply to 0.6 per cent from 0.9 per cent, and French consumer prices fell in July.
Investors will look to numbers next week, such as US consumer confidence on Tuesday and Germany's Ifo influential business sentiment index on Wednesday for guidance on how the economies are faring.
"The key issue is the direction of the economy, and momentum is clearly fading but we expect rate cuts from the Federal Reserve, the European Central Bank and the Bank of England between now and the end of the year to reignite economic growth next year," Goldman Sachs' Sullivan said.
Among those companies reporting next week are supermarket groups Carrefour and Ahold, and reinsurers Munich Re and Swiss Re.