Financial Stocks Drag on European Market

European shares fell on Wednesday as bank stocks sank on both sides of the Atlantic -- notably Royal Bank of Scotland in Europe -- and as high oil prices stoked fears of rising inflation and slower growth.

The FTSEurofirst 300 index of top European shares tumbled 1.7 percent to 1,249.46 points, its lowest close since March 20.

It has fallen for six straight sessions and lost more than 9 percent in the past three weeks, leaving it just over 4 percent above the year low set on March 17.

"We are in an environment at the moment where at best we will have a flat trend with some swings around it," said William De Vijlder, global chief investment officer at Fortis.

Royal Bank of Scotland (RBS) dropped 9 percent after the UK bank said results would be held back by the impact of the global credit crunch, despite current performance and writedowns on risky assets remaining in line with its previous outlook.

"The global markets business will see lower revenues, group loan growth will have slowed and the net interest margin will be under pressure but, importantly, UK credit quality remains good," NCB Stockbrokers said in a note on RBS.

The DJ Stoxx bank index, down 2.8 percent, was the leading sector loser in Europe.

British mortgage bank HBOS slumped 11.6 percent to 258 pence, well below its planned rights issue price of 275 pence per share.

Lloyds lost 5.3 percent and Barclays 4.7 percent. UBScuts its price targets on HBOS, Barclays and Lloyds.

Outside Britain, shares in Swiss bank UBS and French Societe Generale fell more than 3 percent.

"One of our biggest worries at present is the outlook for the 'originate-to-distribute' business model," Credit Suisse said in a note on European wholesale banks.

"A great deal of the profitability of the European wholesale banking sector is built around a business model of originating assets to distribute them for a fee rather than holding them on the balance sheet to earn spread income. This could become significantly more difficult in the future," Credit Suisse said.

Second Round

In the United States, the S&P 500 financial sector sank to a five-year low, led by declines in investment bank shares on talk of large writedowns at Goldman Sachs.

The bank said it does not comment on market rumors.

"The financial crisis has not been called off; there may be second round effects with new billion euro losses in the western banking and finance universe," Norwegian asset managers Skagen Funds said in a report.

Crude oil futures rose after data showed U.S. crude stocks declined by 4.6 million barrels last week, more than the 1.1 million barrel decline forecast by analysts.

Energy group BP, up 1.5 percent, was among the day's few heavyweight gainers in Europe.

Top central bankers have warned repeatedly of the inflation impact of surging oil prices, raising fears that higher interest rates may hurt economic growth and corporate profits.

"In the near-term with central banks talking increasingly 'tough' against a backdrop of a weak cyclical picture, equity markets are likely to face substantial challenges," Goldman Sachs said in a research note.

Pointing to the same factors and, in addition, rising wage costs and the weak U.S. dollar, FrankfurtFinanz analyst Heino Ruland said in a German equity strategy note corporate profits "will become increasingly threatened."

Among the few blue chips swimming against the tide, German chipmaker Infineon gained 1.7 percent, helped by a price-target upgrade from ABN Amro.

"With Apple launching the 3G iPhone at an attractive price point from July 11, we expect Infineon to be a prime beneficiary," ABN Amro said in a research note.