Credit Worries Knock European Share Prices

European stocks sank for a second day in a row on Friday, knocked lower by sharp declines in banking shares on fears that financial institutions have not yet revealed the full impact of the crisis in the credit market on their results.

UK bank Barclays plunged 6 percent on market talk of funding worries and speculation that Britain's third-biggest bank was telling analysts to trim profit forecasts.

Both the Bank of England and Barclays declined to comment.

Other banks also took a beating, with UBS down 4.2 percent and HSBC down 2.1 percent.

Belgian-Dutch group Fortis fell 4.6 percent after UBS downgraded the stock to a "sell" from a "buy," saying the bank had revealed little about possible subprime exposures and could be vulnerable in a downturn.

The FTSEurofirst 300 index of top European shares closed 0.7 percent lower at 1,559.87 points, after losing 1.6 percent on Thursday.

"Financial stocks remained under great pressure. The banks still have major balance sheet problems and I think we will continue to have big negative news on that front," said Jean-Francois Virolle, chief strategist at Global Equities, in Paris.

"It's not something that can be fixed in one quarter by setting up provisions. It could take many quarters, even years to resolve the crisis, so the outlook for banks is pretty ugly."

Banks worldwide have taken charges totaling billions of dollars on holdings in mortgage-backed securities, which have been hit by a rising tide of defaults in U.S. subprime mortgages -- loans extended to borrowers with patchy credit histories.

Worries over the impact of the turmoil in the subprime market have sparked a selloff in financial stocks in recent months.

The fresh fears over the past two days were triggered when Citigroup stock plunged nearly 7 percent after two brokerages lowered their investment ratings amid fears it might have to cut its dividend.

On Friday the spotlight was on Merrill Lynch, down 9 percent around midday on Wall Street, after the brokerage's credibility came under increased attack after an analyst said Merrill sought to mitigate write-downs by parking subprime-related assets with hedge funds.

Merrill said it has no reason to believe that any such inappropriate transactions occurred.

The DJ Stoxx European banking sector index, is down nearly 12 percent on the year.

"The subprime/derivatives crisis is by no means over," ABN Amro analysts wrote in a note.

"While the U.S. growth slowdown is likely to remain contained, the key downside risk remains that impaired balance sheets could force banks to cut credit across the board," they wrote.

"The credibility of the Fed's stated intent not to proceed with further significant rate cuts is likely to get tested by the market and to generate volatility."

The two-day equity slump comes after the U.S. Federal Reserve cut benchmark interest rates on Wednesday and said financial market strains had eased somewhat, signaling more rate reductions were far from a sure bet.

Mining shares also retreated on Friday, as copper prices tumbled to seven-week lows on concerns over demand. Rio Tinto shed 0.9 percent and Anglo American slipped 1.7 percent.

Around Europe, Germany's DAX index lost 0.4 percent, UK's FTSE 100 index dropped 0.8 percent and France's CAC 40 shed 0.2 percent.

British Airways fell 2.7 percent after cutting its full-year revenue outlook due to the weak dollar.

Equities briefly trimmed losses around midday after surprisingly strong U.S. non-farm new jobs data in October that eased worries over the health of the world's largest economy.

The Labor Department reported that U.S. employers added 166,000 new non-farm jobs in October, twice as many as Wall Street economists had forecast for the strongest hiring since May.