Banks Drag European Shares Lower

European shares ended Thursday's choppy session down slightly as concern about the reach of the credit crunch offset a potentially supportive shift in market expectations for no more euro zone rate rises this year.

The European Central Bank and the Bank of England left their respective interest rates on hold, as expected.

The ECB signaled it was unlikely to raise euro zone rates again any time soon as growth risks had materialized.

But some of Europe's major financial groups including British bank Barclays and German insurer Allianz released results that showed the ongoing damage from the credit crunch.

The FTSEurofirst 300 index of top European shares ended down 0.3 percent at 1,190.06 points, having swung between a gain of 0.9 percent and a loss of 0.7 percent.

Barclays shares were among the top gainers within the European banking sector, rising 1.6 percent after the company unveiled more writedowns but beat expectations with its results.

"Generally, the overall tone of the banks had been better. I think not just in the UK but in America too," said Mike Lenhoff, chief strategist and head of research at Brewin Dolphin.

"They haven't been quite as dismal as you might have been led to believe on the back of all the things we know have been going on," he said. "Also, I think a lot of bad news is already priced into the equities market."

The market got a small lift from the ECB's indication it would not raise euro zone rates again any time soon because of the risks to regional growth.

Dampening US Impact

But a weak start to trade on Wall Street and ongoing concern about the impact of the credit crunch on some of the world's largest companies kept any afternoon gains in check.

American International Group, the world's largest insurer, reported another large quarterly loss, while some of its top European rivals, including Allianz and AXA, saw the credit crunch erode their profits.

Allianz shares were up 0.2 percent, having fallen earlier by as much as 4.3 percent, while AXA was up nearly 5 percent.

Banks took the early spotlight in Europe after Barclays, Germany's Dresdner and Belgium's KBC unveiled over $5 billion more in asset writedowns. Other European bank shares fell.

HSBC lost 1.2 percent, Banco Santander fell 1.7 percent, while KBC lost nearly 7 percent, and Belgian financial services group Dexia lost 10 percent after announcing an overhaul for its loss-making U.S. bond insurance unit.

The FTSEurofirst 300 got a brief lift earlier after the ECB left euro zone rates at 4.25 percent in a widely anticipated decision, and bank President Jean Claude Trichet later said risks to growth had materialized, prompting financial markets to rule out more rate rises this year.

"I was a bit surprised that Trichet conceded that growth would be so weak in mid-year, especially given rates only rose in July," said Commerzbank economist Peter Dixon. "I would say that although Trichet suggests no bias to rates, the risk is tilted towards the view that the next move in rates is likely to be down."

Beyond the financial sector, utilities led by EDF and energy shares ranked among the biggest gainers.

EDF bounced nearly 6 percent in response to planned electricity tariff increases from the French government that were larger than expected.

Shares in French water and waste management group Veolia rose 9 percent after the company raised its 2008 sales growth goal and vowed to speed up cost cuts and sell assets.

A firmer oil price helped BP, ENI and StatoilHydro edge up to the top of the leaderboard in Europe.

BP was up 2.4 percent, while ENI and StatoilHydro gained 1.8 and 2.3 percent and Total rose 0.3 percent.

Elsewhere in the commodities sector, platinum miner Lonmin rose 0.6 percent.

The company said it would vigorously contest a $10 billion bid approach from miner Xstrata. Xstrata shares were down 1 percent.

On the downside, Nestle was among the largest negative influences on the broader market after the world's largest food company beat expectations with its first-half profits, but the impact of the weak dollar and lower-than-forecast volume growth stripped about 1 percent off its shares.