European blue chips crumbled to six-year lows in midsession trade yesterday on fears insurers such as ING must sell equities to bolster solvency ratios and as the spectre of war with Iraq loomed large.
Markets were gripped by suspense once again after US President George W. Bush promised overnight the United States would deliver new intelligence on Iraqi weapons of mass destruction to the UN security council next week.
"Investors have been frightened by the uncertain outlook, we do not know when war with Iraq will start, how long it will last and what impact it will have on the US budget deficit," said Rene van der Zeeuw, head of European equity investments at Robeco in Rotterdam.
"The only thing we are clearer on after Bush's speech is that his patience is running out and there will be war at some point."
The telecom sector fell heavily after fourth-quarter results from mobile operator Orange failed to top analysts' most optimistic forecasts. Shares in Orange dropped 2.7 per cent.
Sentiment was also hit by weaker US stock index futures.
By 1121 GMT, the FTSE Eurotop 300 index of pan-European blue chips was down 1.46 per cent at 761 points - its lowest level since the spring of 1997.
The narrower DJ Stoxx Europe index fell 1.6 per cent to 2,125.
"The key support level on the DJ Stoxx Europe index is 2,100, it did briefly dip to 2,086 points earlier today but if it closes below this level then the index could fall another 10 per cent, possibly more," said Nick Glydon, technical analyst at JP Morgan Chase said.
Worries about a possible conflict in the Gulf were the main concern. In his State of the Union address earlier yesterday, Bush made his case against Iraq and said "some crucial hours may lie ahead" for US troops.
He called on the United Nations Security Council to convene on February 5 to hear Secretary of State Colin Powell present information about Iraq's suspected weapons of mass destruction.
But some investors were keeping their powder dry on hopes that the market will bounce if and when war is declared.
"When war breaks out some of the uncertainty will be removed and markets should bounce. Fundamentally prices are looking attractive at the moment as short-term interest rates are well below dividend yields in Europe and stocks have been beaten down to pre-tech boom levels," said Robeco's van der Zeeuw.
Some national markets broke through important technical support levels, the Dutch blue chip AEX index for example tumbled through a key support at 278 points triggering fears that this will prompt financials to sell equities in order to boost their solvency ratios.