Fears Return, Euro Stocks Close Lower

European stocks closed lower on Wednesday after half-hearted attempts to bounce in the green during the day, as fears over the health of the financial markets returned to haunt the markets following yesterday's rally.

U.S. bank Morgan Stanley's better-than-expected results managed to pull up European stocks in the mid-afternoon, but the markets' glee was short-lived.

Morgan's income from continuing operations fell by about a third to $1.55 billion, or $1.45 a share, in the quarter ended Feb. 29, compared with market expectations of $1.03 a share.

Worries about the health of the UK banking sector, coupled with market speculation about major players being faced with hardships, brought out the sellers.

The mood was in sharp contrast to Europe's rally on Tuesday and strong performance from other global markets.

British mortgage lender HBOS fell as much 17 percent before recovering somewhat, to close more than 6 percent down, while Societe Generale lost 7 percent after BNP Paribas said it would not bid for the French bank.

A Merrill Lynch study of fund managers showed 40 percent of them were underweight financials, Karen Olney from Merrill Lynch told "European Closing Bell."

Investors were also underweight equities and bonds and overweight cash and commodities, Olney added.

"Bonds aren't offering any value. Investors are telling us they see more value in equities but they're not ready to make the plunge," she said.

Royal Bank of Scotland lost more than 2 percent, while Barclays, which fell by 2.1 percent previously, closed 2 percent up.

The UK's Financial Services Authority is investigating trading in financial shares after the rumors that swept the market in the morning.

A couple of profit warnings also dented enthusiasm.

Ericsson closed more than 7 percent down after its joint mobile handset venture Sony Ericsson said first-quarter sales would fall from the year-ago period due to weakness in the European market.

And low-cost airline easyJet closed more than 9 percent lower after it said second-half profit will miss its expectations if fuel costs stay at current levels.

© 2008 CNBC.com