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Banks Drag European Shares Sharply Lower

European stocks fell on Wednesday, as slipping crude knocked oil shares and financials took a fresh battering after U.S. banks Morgan Stanley and Fifth Third revealed credit-related struggles.

The pan-European FTSEurofirst index ended down 1.4 percent at 1,251, having earlier fallen to 1,246.62, its lowest level since the end of March.

Banks led the decline, with Royal Bank of Scotland off 5 percent, UBS down 4 percent and Santander dropping 2.3 percent.

"The market clearly is very strongly in the clutches of the bear, there's no question about it," said Mike Lenhoff, chief market strategist at Brewin Dolphin in London.

"One just has to bear it," he added. "The whole process seems to be evolving into a vicious cycle."

Financials dragged on Wall Street after Morgan Stanley said its earnings dropped by more than half and Fifth Third Bancorp announced a dividend cut and a plan to raise capital.

Oil Shares Weigh

Oil shares also weighed down on the European market as crude prices fell about 1 percent to below $133 a barrel after data showed a surprise rise in U.S. diesel and heating oil stocks last week.

BP, which fell 2.1 percent, was the biggest individual lag on the index, while Royal Dutch Shell lost 2.7 percent and Total shed 1.6 percent.

"Oil may well find itself under further pressure and the high levels of volatility we've been seeing here mean that a retest of $140 would be of little surprise," Jimmy Yates, a dealer at CMC Markets in London, said in a note.

"There's certainly not much to be cheerful about," he added.

European Central Bank (ECB) executive board member Juergen Stark said euro zone inflation was intolerably high and it was an appropriate point to review interest rates.

Another senior ECB official, Yves Mersch, said that there was a "possible certainty" of a rate rise in July.

Investment bank Merrill Lynch said its monthly poll of 204 fund managers across the world showed some of the most negative stances on equities it has seen in 10 years.

Merrill noted that Europe, including Britain, had taken the brunt of the gloom, moving over 12 months from the most favored region to the least favored for equities.

Shares in Huhtamaki fell 11.6 percent after the consumer packaging maker revised down its 2008 estimates due to rising raw material, energy and distribution costs.

Stora Enso shares fell 7.9 percent after the world's largest paper and board maker said second-quarter operating profit would halve from a year ago due to rising raw material costs.

And UPM-Kymmene, the world's top magazine paper maker, fell 4.4 percent after it, too, warned on 2008 profitability, citing high wood costs.

But Hennes & Mauritz, the world's third-biggest clothing retailer by sales, saw its shares leap 5.8 percent to 344 Swedish crowns after second-quarter profit and May sales beat market expectations.

Citigroup reiterated its "buy" recommendation and target price of 400 Swedish crowns for H&M.

France's Sanofi-Aventis rose nearly 1 percent after it said it planned a $2.6 billion offer for Czech drugmaker Zentiva, whose shares climbed 6.8 percent.

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