Euro Shares Slide as Economy Eclipses Rate Cuts

European markets fell sharply on Thursday, led by banks and energy shares, as the prospect of economic slowdown overshadowed another round of central bank interest-rate cuts.

The European Central Bank, which cut rates by half a percentage point as expected, and the Bank of England, which shocked markets with the largest official rate cut since 1981, did little to support equities, where investors are now looking beyond the turmoil of the financial crisis to the damage to the economy.

Heavyweight stocks from a variety of sectors hit the index: HSBC lost 4.1 percent, Vodafone dropped 7.8 percent, BP fell nearly 6 percent and EDF shed 6.3 percent.

The FTSEurofirst 300 index of top European shares ended down 5.78 percent at 898.13 points.

"We did rally 20 percent in both Europe and the UK and we did that in under two weeks; what that rally was about was the story about the worst of the financial crisis being behind us," said Dresdner Kleinwort strategist Philip Isherwood.

"Now that is perfectly legitimate ... while that 20 percent rally was recognizing the worst of the financial crisis was over, the same cannot be said for the economy," he said.

Banks were again the worst performers, as the potential lift for the sector from more rate cuts was quashed by the growing concern over the depth and duration of the economic slowdown.

• BoE Cuts Rates by Record 150 Basis Points
• ECB Cuts by Only Half a Point

HSBC was the largest negative drag on the overall market, followed by UBS, which fell by nearly 8 percent, Banco Santander, which shed 6 percent and BNP Paribas and Credit Suisse, which lost between 7 and 7.6 percent.

Elsewhere in financials, the world's biggest listed hedge fund, Man Group, tumbled 31 percent amid fears that its clients would liquidate yet more funds, while AXA, Europe's biggest insurer by market capitalization, fell 9.2 percent after reporting lower 9-month sales.

Revenue was affected by outflows at its asset management division because of turbulent market conditions.

The ECB delivered a widely anticipated rate cut of half a percentage point to the euro zone, bringing its benchmark rate down to 3.25 percent, the lowest in two years.

ECB President Jean-Claude Trichet signaled another cut was possible this year as inflation pressures ease and the euro zone faces its first recession.

Trichet's suggestion that inflation could pose less of a risk did nothing to lift European stocks as analysts said the half-point cut was already priced in to the market. Many were even hoping for three-quarters of a point.

The Bank of England earlier cut British rates by 1.5 percentage points to 3 percent, its largest cut since the 1981 slump, trumping expectations for a half-point cut in rates.

"This decision is unprecedented and the market is going to be confused for a time by it," said Jim Wood-Smith, head of research at Williams de Broe.

"On the one hand, it is good news; on the other hand, it is confirmation that we are up a gum tree."

Around Europe, the FT-SE 100-share index fell 5.7 percent, Germany's Xetra DAX index lost 6.8 percent and France's CAC-40 index fell 6.4 percent.

Energy stocks took a hit as crude prices fell. Royal Dutch Shell and Repsol YPF both lost around 7 percent, while Total fell 5.9 percent and StatoilHydro lost more than 10 percent.

A retreat in metal prices also weighed on mining shares, with copper down 3.4 percent. Rio Tinto, BHP Billiton and Xstrata were all down around 14 percent, while Vedanta Resources lost over 20 percent after posting a 24.7 percent drop in first half profit.

Among gainers, brewer InBev gained 0.5 percent as it insisted its $52 billion takeover of Anheuser-Busch was on track after third-quarter results slightly exceeded expectations despite rocketing costs.

Copyright 2008 Reuters. Click for restrictions.