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Russian Market Tumbles 5.5%; Paris Bucks Trend

Most major indexes across Europe saw red arrows Friday, with Russia sinking the most after the country's prime minister launched an attack on a steel giant.

MICEX, the exchange where the bulk of trading in Russian stocks takes place, plunged 5.5 percent, while the RTS, a leading index, lost 5.6 percent at 1,951.29, sinking beneath the critical 2000-point barrier for the first time since March.

After Prime Minister Vladimir Putin's scathing attack on Mechel late Thursday, heavy trading in New York sent the steel and coal maker's stock down nearly 40 percent, wiping more than $5 billion off its value. The losses were mirrored Friday morning in Russian trading.

Putin criticized the company, which is the largest supplier of coal for steelmakers in Russia, for charging much higher prices for raw materials domestically than it does for its exports. He called for an antitrust investigation into Mechel's activities.

Earlier Thursday Robert Dudley, CEO of the embattled Anglo-Russian oil producer TNK-BP, left the country three days before his visa was due to expire. Russia has not renewed the visa on the ground that he allegedly does not have a valid work contract.

Dudley, who said in a statement his departure follows a sustained assault on the company in the past several months, vowed to run the company from abroad.

The developments rattled investors, leading to a heavy sell-off in Russian equity, which is dominated by oil stocks.

"Sentiment is moving against Russia," said James Fenkner, managing partner at Red Star Asset Management in Moscow. "If oil has any kind of bounce, the market will look kindly on Russia. If oil (prices) begin to slip, there will be a great unwind."

Observers say soaring oil prices have largely masked the political tensions, and investors are tensely watching how the corporate conflict plays out at TNK-BP, widely seen as a test case for foreign investment under new President Dmitry Medvedev.

Medvedev, who campaigned on an anti-corruption ticket, has insisted the conflict is a matter between the shareholders. Many analysts are convinced, however, that the state wants to take a controlling stake in the company at a later date via a state-owned entity.

Overall, European stocks ended slightly lower on Friday, after a flurry of better-than-expected U.S. economic data failed to eclipse a profit warning by Munich Re that knocked insurers lower.

Insurers shed 6.4 percent in the DJ Stoxx European insurance index after Munich Re significantly reduced its forecasts for 2008 profit.

On the upside, Danone surged 7.7 percent after the food and beverage group lifted its 2008 operating margin target and confirmed 2008 sales and EPS growth outlook.

The FTSEurofirst 300 index of top European shares unofficially ended 0.09 percent lower at 1,169.70 points, after falling by more than 1 percent during the session.

Late in the session, better-than-expected U.S. data reassured investors on the outlook of the world's biggest economy. U.S. consumer sentiment recovered unexpectedly in July, sales of newly built single-family homes were stronger than expected in June, and U.S. durable goods orders for June unexpectedly rose.

"Core durable goods shipments increased for the fourth consecutive month, signalling resilient investment in equipment despite a difficult context," Jean-Marc Lucas, economist at BNP
Paribas, wrote in a note.

Across Western Europe, Munich Re led the pack lower after issuing a profit warning. The exception was in Paris, which managed a modest gain in late trading.

Banks underperformed, tracking weaker U.S. financials after disappointing housing data from the U.S. and after UBS retreated 7.4 percent on the back of news that New York State has filed a lawsuit against the bank, accusing it of deceptively selling auction-rate securities as cash equivalents.

The FTSEurofirst 300 index of top European shares lost 1.1 percent to 1,157.71 points.

Late in the session, better-than-expected U.S. data reassured investors on the outlook of the world's biggest economy. U.S. consumer sentiment recovered unexpectedly in July, sales of newly built single-family homes were stronger than expected in June, and U.S. durable goods orders for June unexpectedly rose.

"Core durable goods shipments increased for the fourth consecutive month, signalling resilient investment in equipment despite a difficult context," Jean-Marc Lucas, economist at BNP Paribas, wrote in a note.

-- wire services contributed to this report