Euro Stocks Near 5-Year Low after Rate Cuts

European shares sank to a near 5-year closing low on Wednesday after highly volatile trade, shrugging off coordinated rate cuts by top central banks as credit market and economic growth worries persisted.

The FTSEurofirst 300 index of top European shares, which has lost 13.6 percent this week, closed down 6.3 percent at 940.78 points -- the lowest close since Dec. 17, 2003.

The benchmark European index slumped nearly 8 percent in early trade, then gave up most of its losses following the rate cuts, only to tumble further late in the day.

The U.S. Federal Reserve led a round of official rate cuts on Wednesday and eased by half a point, as did the European Central Bank.

The Bank of England and central banks in Switzerland, China, Canada and Sweden also cut rates.

"It is an important signal that the central banks are making an effort, that they intend to do everything in order to rectify what is happening in the market," said Stockholm-based Nordea analyst Annika Winsth. "But this is not enough to solve the problems ...More measures will be needed."

The banking sector took the most points off the index, with Anglo Irish Bank sliding 15.6 percent, Deutsche Bank falling 10.7 percent and Banco Santander down 5.8 percent.

Banks have taken a battering over the past few days as investors shrugged off a $700 billion U.S. bailout package and focused instead on a drying up of money markets.

Interbank borrowing rates remained high after the concerted cuts on Wednesday.

The worst financial crisis since the Great Depression forced Britain to announce a multi-billion pound rescue package for banks that included plans to inject up to 50 billion pounds of government money into the country's biggest operators.

British bank shares reacted positively overall, with HBOS jumping 24.5 percent and Royal Bank of Scotland rising 0.8 percent.

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Fears of Economic Slowdown

Fears of a steep slowdown in economic growth sharpened, with the International Monetary Fund saying the world economy was set for a major downturn.

The IMF slashed its 2009 forecast for world growth to 3.0 percent from a July projection of 3.9 percent, and warned that a recovery from the worst financial crisis since the 1930s would be unusually slow.

In addition, three of the euro zone's leading economic research institutes cut their estimate for third quarter gross domestic product (GDP) growth to a contraction of 0.1 percent from a July prediction of an increase of 0.3 percent.

"Recession is coming. Earnings downgrades are coming. A lot of bad news is in the price already. Depression is not priced in," said Citigroup equity strategists in a research note.

"Fundamentals very poor. Sentiment very poor. Little hope amongst investors. But, policy makers surely must (and will) react aggressively," they said.

Citigroup nevertheless upgraded the UK banking sector from underweight to neutral, citing the government rescue package.

Commodity stocks weighed heavily on the benchmark index, tracking slides in crude oil and base metals, with BHP Billiton dropping 10.5 percent, Rio Tinto falling 9.9 percent and Antofagasta down 8.4 percent.

As in recent days, German carmaker Volkswagen was a standout gainer, up 2.5 percent.

Morgan Stanley said its recent rise could be a result of sports car maker Porsche building a stake.

But the focus was unequivocally on the bigger picture as central banks pulled out the stops.

"The battle may not be won yet. But today's move together with recent massive government intervention suggests to us that policymakers will do whatever it takes to avert a 1930s-style outcome," said Morgan Stanley economist Joachim Fels in a note.

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