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Weak Banks, Rallying Oil Drag Euro Stocks Lower

European stocks ended lower on Wednesday, adding to the previous day's sharp losses as oil prices soared past $132 a barrel to a fresh record, heightening inflation fears and concerns for corporate profits.

UBS slid 3.5 percent on concerns over the size of its planned rights share issue.

Traders cited market talk that the Swiss lender would have to issue more shares to raise the amount of money it needed because the value of its shares has recently fallen.

The FTSEurofirst 300 index of top European shares closed 0.7 percent lower at 1,340.63 points, its lowest close since May 1.

Oil heavyweights such as BP and Royal Dutch Shell kept UK's FTSE-100 index afloat.

The index eked out a gain of 0.1 percent on the day while Germany's DAX index lost 1.1 percent and France's CAC-40 shed 0.5 percent.

BP gained 3.5 percent, Royal Dutch Shell surged 4.7 percent and Spain's Repsol rose 1.8 percent.

U.S. crude oil futures surged above $132 a barrel on Wednesday after data showed a sharp drop in U.S. fuel inventories.

"The recent acceleration in the rise of oil prices will have a strong impact on stocks at some point and we're already seeing profit warnings from companies that are big consumers of commodities and energy," said Emmanuel Morano, head of equity management at La Francaise des Placements, in Paris.

Airline stocks, sensitive to oil prices, got hammered. Ryanair tumbled 5.1 percent, Air France KLM shed 3.5 percent and Lufthansa lost 3.1 percent.

But banks were the heaviest negative weight on the market, with the DJ Stoxx European banking sector index dropping 2.3 percent.

"Banks had recovered from their lows hit in mid-March after we got some relief from the rescue of Bear Stearns, and all the capital increases gave a signal that business would continue," Morano said.

"But these capital increases are double-edged swords. With more shares out there now and with shrinking earnings we're back to valuation ratios such as P/E higher than before the whole credit crisis kicked in, and UBS is probably the most amazing example of that."

Banking stocks have been hit over the past year by fears over the impact of a meltdown in the U.S. subprime mortgage market that has forced banks to unveil massive asset writedowns and emergency capital injections.

The DJ Stoxx bank index has lost 19 percent so far in 2008, while the broader European FTSEurofirst 300 index has fallen 11 percent over the same period.

Infineon tumbled 6.9 percent on worries over slowing North American microchip orders after gloomy industry data released overnight.