Banks lead European shares lower on contagion fears

LONDON: European shares fell on Monday as banks extended declines from Friday in response to intensified worries about euro zone peripheral debt contagion.

At 0850 GMT, the FTSEurofirst 300 index of top European shares was down 0.6 percent at 1,108.31 points, after falling 0.8 percent on Friday, when a US government report showed much lower jobs growth than expected.

The STOXX Europe 600 Banking Index fell 1.3 percent, and is down 9.6 percent in 2011, illustrating investor worries over the sector's exposure to the euro zone debt crisis.

Italian bank Intesa SanPaolo fell 1.9 percent but UniCredit rose 1.9 percent after falling 19.8 percent last week.

Other heavyweight banks under pressure included France's BNP Paribas and Societe Generale , both down 3.4 percent.

Italian market regulator Consob on Sunday approved new disclosure requirements on short positions in an effort to curb stock volatility after a sell off hit domestic bank shares and government bonds on Friday.

"Investor sentiment is on the back foot this morning. Nobody knows where this is going to stop and when the next domino will fall, but you can't stop investors from speculating despite the typical arm-waving on the part of the European officials on what they regard as the intrusive influence of hedge funds," Jeremy Batstone-Carr, strategist at Charles Stanley, said.

"Italy is in a different order of magnitude from Greece, Portugal and Ireland and takes the crisis to a whole new level."

European Council President Herman Van Rompuy called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region's third largest economy.

The European Central Bank raised interest rates last week.

"For all of Jean-Claude Trichet's protestations, the ECB's actions are making things worse and worse. Not just for the periphery where interest rates continue to climb, but for the core also, as markets begin to connect the dots between various banking systems in the euro area. See Italian banks struggle and then to no surprise the French ones follow," Jefferies said in a note.

The Thomson Reuters Peripheral Eurozone Countries Index was down 1.8 percent.

BSKYB FALLS

Among individual shares, BSkyB fell 6.7 percent, the top faller in the pan-European index, as the British government asked the media regulator to consider whether undertakings provided by News Corp to secure a buy out of BSkyB were still credible in light of a phone hacking scandal.

Northumbrian Water rose 4.2 percent after it said a group owned by Li Ka-shing, Hong Kong's richest man, has made a takeover approach that values the British water utility at about 2.4 billion pounds ($3.9 billion).

Other utilities gained, including Scottish & Southern Energy , up 1.1 percent and International Power , up 4.5 percent, with the latter helped by an Australian carbon tax proving to be fairly benign.

Vedanta Resources , down 0.9 percent, was among miners to fall as the dollar strengthened against the euro, putting pressure on base metals.

Aluminium company Alcoa will kick off the second-quarter US earnings season after the market closes on Monday.

"For European companies, the strength of the euro will have contributed a headwind. If there are going to be earnings beats, I think they will be significantly below the beats we got in the first quarter," Batstone-Carr said.

"The ceiling is in place with macro uncertainty and geopolitical uncertainty. Valuations are supporting. The importance of the earnings season is that it tests the strength of the floorboards," Batstone-Carr said.

The pan-European index is in the middle of a range defined by the 2011 high it hit in mid-February, 1,190.51 points, and the low of mid-March, 1066.62.

Copyright Reuters, 2011