Tumbling oil prices and doubt about the course of war in Iraq put the brakes on a four-day rally in European stocks yesterday, with fund managers saying they were braced for massive volatility going forward.
Heady gains in German chemical firms BASF and Bayer were not enough to sustain an earlier advance, when optimism over Iraq prompted a burst of short-covering from players who had bet on further falls.
Other standouts included Wella, which jumped 20 per cent to 90.45 euros after US consumer goods leader Procter & Gamble took control of the German hair care group for $5.7 billion.
But Iraq dominated the talk in dealing rooms, as Saddam Hussein rejected an ultimatum to quit his country and vowed to fight a US-led invasion that could start in little over a day.
"The oil price has had its most severe drop in years. Meanwhile people are starting to wonder if this quick war scenario we are all anticipating is realistic, so we are seeing huge swings between asset classes," said Lex Werkheim, fund manager at Eureffect in Amsterdam.
"This is not long-term investors at work, it's smart money going in and out of stocks, oil, bonds and gold in very short bursts and it's all event-driven. Will Saddam burn the oilfields? How long will the war last? We're in for much higher volatility," he added.
By 1632 GMT the FTSE Eurotop 300 index was down 0.2 per centat 778.07, still some 14 per cent above last Wednesday's close of 682.71 when it plumbed a six-year closing low.
The narrower DJ Euro Stoxx 50 was down 0.75 per cent at 2,141.87, tracking a lacklustre Wall Street where the Dow Jones industrial average was up 0.3 per cent and the Nasdaq Composite down 0.15 per cent.
The Federal Reserve is holding a policymaking committee meeting but is widely expected to preserve its dwindling economic ammunition by keeping US interest rates on hold.
A decision is scheduled to be announced at about 1915 GMT.
A near seven-per cent drop in crude prices in anticipation that a brief war in the Middle East would cause minimum disruption to supplies, sent oil company shares skidding, with TotalFinaElf off 3.5 per cent at 120 euros. The DJ Stoxx energy sector shed 1.8 per cent overall.
Investors also took some money out of insurers, a sector which had bounced strongly from last week's 10-year lows.
On the upside, shares in Europe's chemical leader BASF jumped 10.4 per cent to 34.43 euros after the firm beat expectations for fourth-quarter profits and predicted a strong start to 2003, fuelling a powerful rally across the sector.