Banks, High Oil Push European Stocks Lower

European stocks fell 2.2 percent on Tuesday, ending at their lowest close since October 2005 as fears of asset writedowns returned to haunt the banking sector, while strong oil prices continued to stoke inflation concerns.

Banks took yet another beating, with UBS hitting 10-year lows, down 5.3 percent, while Deutsche Bank lost 4.4 percent as talk swirled that more hefty writedowns stemming from the credit crisis could further hit second-quarter earnings within the banking sector.

France Telecom bucked the trend, featuring among the very few stocks on the upside as several brokerages upgraded their rating on the stock after the company dropped its takeover offer on Nordic telecoms operator TeliaSonera.

The FTSEurofirst 300 index of top European shares closed 2.2 percent lower at 1,175.55 points.

The index, which has fallen in seven of the last 10 sessions, has tumbled about 22 percent so far in 2008.

"The impact from the U.S. subprime market debacle is far from over, especially for retail banks and insurers, while investment banks have already unveiled big writedowns," said Romain Boscher, head of equity management at Groupama Asset Management, in Paris.

"But it might be time to come back on some industrials, and we remain confident on commodity-related stocks as the slowdown in growth has already been priced in," he said.

Mining and energy stocks were among the biggest losers, retreating on worries over the outlook for the global economy, despite buoyant oil and base metal prices.

BP shed 2.4 percent, Rio Tinto lost 4.1 percent, and Xstrata fell 4.8 percent.

But despite Tuesday's losses, the DJ Stoxx basic resources index, home of the heavyweight mining stocks, remained Europe's best performing sector so far this year, with a gain of 2.4 percent in the year to date.

At the other end of the spectrum, banks have lost about 35 percent so far this year, making the DJ Stoxx index of European banks the worst performer among the sectoral indexes so far, followed by autos and retail stocks.

"This is more concern coming back in on the banking sector again; there are a lot of rumors about writedowns," said Andrea Williams, head of European equities at Royal London Asset Management.

"We're obviously into the critical period of second-quarter numbers, and analysts are finally beginning to downgrade their forecasts for 2009, whereas they weren't before. They're probably starting to be more realistic about the companies they cover ... so it's all pretty gloomy," she said.

Oil prices remained above $142 a barrel on Tuesday, fuelling concerns over input costs for companies and over consumer spending.

Auto stocks tumbled, with BMW down 1.9 percent, Peugeot down 3.6 percent, and Renault down 2 percent.

Around Europe, Germany's DAX index ended down 1.6 percent, UK's FTSE-100 index down 2.6 percent, and France's CAC-40 down 2.1 percent.

So far this year, the DAX is down 22 percent, the FTSE-100 is down 15 percent, and the CAC-40 is down 23 percent.