European Stocks Index in Biggest Drop in 8 Weeks

European shares suffered their largest one-day percentage drop in eight weeks on Thursday, hit by declines in banks as renewed worries about the fragile health of financials spooked global markets.

UBS, HSBC, BNP Paribas and Barclays all fell between 2.7 percent and 5.4 percent.

The sharp losses wiped out the previous day's gains made in U.S. stocks when the Fed cut interest rates and knocked markets from two-week highs.

The pan-European FTSEurofirst 300 index ended down 1.6 percent at 1,570.4, its lowest close since Oct. 25 and its biggest daily percentage drop since Sept. 7, when a shock fall in U.S. jobs data sent the index down 2.15 percent.

The index however closed above the day's low of 1,563.1.

"The risk remains that economies don't slow down and therefore interest rates have to go back up and bond yields go higher," said Max King, global strategist at Investec Asset Management.

"We have seen plenty of chatter about economic slowdown but no real hard evidence in the U.S. or anywhere else. That means the bond market is taking a lot for granted and that worries us."

"We think that 2007 will fizzle out rather than go out as a bang," King said, adding that Investec had recently become slightly more cautious on stocks.

The FTSEurofirst is still up 6 percent so far this year but short of the 14 percent gain it made by this time last year.

U.S. stocks tumbled after a brokerage downgrade of Citigroup renewed concerns of more fallout from the credit crisis.

Banking Concerns

U.S. Treasury prices rallied as steep stock losses and a resurgence in credit worries spurred demand for safe-haven investments.

The Fed cut U.S. interest rates by 25 basis points on Wednesday to buffer the economy from a housing downturn, but suggested further rate reductions were far from a sure bet.

The Fed offered a bit of a surprise by saying the risk of inflation was about equal with downside risks to growth.

Shares in Credit Suisse fell 4 percent after the bank reported big writedowns on credit market exposures, while analysts also noted market talk rival UBS might have to make further writedowns running to billions of francs in the final quarter.

"There is no doubt on people's minds that U.S. subprime pricing is getting worse," said Alan Webborn at SG securities. "It shows the tail of this credit crisis is long."

Among other losers, Total lost 2.6 percent and Royal Dutch Shell fell 2.3 percent, with oil prices easing from record highs.

Miners Anglo American shed 4 percent and BHP Billiton declined 3 percent as metal prices buckled on worries about stock levels and concern about Chinese sales.

Among standout gainers, shares in Unilever rose 4 percent on confidence the food and consumer goods group will meet its 2007 sales and margin targets, as it met forecasts with a 4.5 percent rise in third-quarter underlying sales.