Financial Stocks, Oil Drag Euro Markets Lower

European stocks fell on Friday, racking up their first weekly loss in a month, after another round of downbeat financial earnings and a record high oil price weighed on the broader market.

The FTSEurofirst 300 index fell 1.3 percent to 1,342.68 points, having fallen earlier by as much as 1.86 percent.

This was the largest one-day fall in a month and snapped a three-week rally in the index.

Banks were the largest drag on the market, even though much of the negative news for financials was confined to the insurance sector.

U.S. insurer AIG reported a record-breaking $7.8 billion quarterly loss on Thursday and financials were hurt by the prospect of big asset sales by Citigroup .

"We've had a couple of announcements, be it AIG after the bell yesterday or Allianz today or Swiss Re the day before, showing the aftermath of the financial crisis is still to show up in bank accounts, that's raised the question of how much capital needs to re raised to restore their Tier One capital ratios," said Heino Ruland, a strategist with FrankfurtFinanz.

Allianz, Europe's largest insurer, said its Dresdner Bank unit had posted a quarterly operating loss of 453 million euros, about the same level as the fourth quarter.

Allianz said it could not give a meaningful forecast for earnings at the bank because of financial market uncertainty.

This comes at the end of a dismal week for Europe's insurers.

Axa and Aegon both disappointed investors with their results, while Munich Re, Old Mutual, Royal & Sun Alliance warned market conditions would be tough.

The DJ Stoxx index of European insurers fell 3.5 percent this week and is down nearly 10 percent this year.

AXA was down 1.9 percent, Swiss Re lost 2.5 percent, and Royal & Sun Alliance fell 3.1 percent.

Allianz shares were down 1 percent, having fallen earlier by as much as 2 percent.

But miner Kazakhmys was the worst loser in Europe, falling 6.7 percent after rejecting a takeover offer from rival Eurasian Natural Resources.

Citi Worries

Citigroup, the largest U.S. bank, said it aimed to sell $400 billion of assets -- nearly 20 percent of its total -- over the next two to three years to become more efficient and profitable.

"Over the past weeks, investors got the feeling that the credit crisis was easing, but a piece of news like that is sort of a wake-up call that reminds us that the storm is far from over," said Marie-Pierre Peillon, head of equity and credit research at Groupama Asset Management in Paris.

"This Citigroup move might just be the beginning." The DJ Stoxx index of European banks fell 1.7 percent, bringing this week's decline to 3.7 percent.

Societe Generale, BNP Paribas and Barclays lost between 2 and 2.5 percent.

The FTSEurofirst 300 has risen by about 13 percent since hitting the low for the year in mid-March.

But the index is down by more than 1 percent this week.

"The rally is running out of steam; it's more to do with the fact that people are realizing the economy in Europe is turning down," FrankfurtFinanz's Ruland said.

Worries about the health of the financial sector combined with a fresh record high in oil prices near $125 a barrel to hit risk appetite, leading to broad pressure on equities.

In a sign the credit crunch is sending waves well beyond the the financial sector, Spain's Grupo Ferrovial lost 4 percent after its British airport operator unit BAA said it may not be in a position to start debt renegotiations in the coming weeks as planned because of market conditions.

Ferrovial shares were down by more than 5 percent.

"We are not out of the woods yet," Lena Komileva, head of G7 market economics at Tullett Prebon said in a research note.

"Risk remains a multi-dimensional story and ... the economic costs are mounting as the crunch moves to the real economy."

Sanofi-Aventis dropped nearly 6 percent after generic drug maker Schweizerhall said it was close to winning approval for a generic version of the French firm's blockbuster blood-thinning drug Plavix in Germany.

A spokesman for Sanofi said Plavix was protected in Europe by its patent until 2013.

European car makers were also under pressure after Toyota Motor, the world's biggest automaker, forecast its first decline in annual net profit in seven years.

Peugeot was down 1.1 percent, BMW lost 4.2 percent and Daimler fell nearly 1 percent.

On the scant gainers' list, German utility E.ON briefly rose as much as 3 percent on speculation of a possible bid from France's EDF, traders said, before easing to show a gain of 1 percent.

E.ON declined to comment.

In late trade, sources familiar with the matter said EDF had submitted an offer for British Energy and would bid without a partner.

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