European shares fell to their lowest closing level so far this year on Thursday, on sovereign debt and economic recovery concerns. The pan-European FTSEurofirst 300 index of top shares closed 1.1 percent lower at 1,131.78 points.
In a sign there could be worse to come, the euro zone's blue chip Euro STOXX 50 index briefly broke through a major resistance point - the 38.2 percent Fibonacci retracement of the rally from its November low to February high at 2,908.76 points - before closing a touch above the level at 2,909.73 points.
Growing worries about the eurozone debt crisis rattled the market after Moody's Investors Service cut Spain's sovereign debt rating one notch and warned of further downgrades, estimating that restructuring savings banks would cost more than twice the government's 20-billion-euro forecast. Spanish banks BBVA and Santander shed 1.7 percent and 1.4 percent, respectively, dragging the wider Spanish market down 1.2 percent.
Spain's rating downgrade puts additional pressure on eurozone leaders, who meet for a two-day summit on Friday, to come up with a sustainable solution to the region's debt crisis. Friday's summit, however, is only likely to lay the ground for a meeting of all 27 EU leaders in Brussels on March 24-25, when they hope to agree on a "comprehensive package" of measures aimed at drawing a line under the crisis.
"The market is hoping that the European Financial Stability Fund will be increased in size and that they (European Union leaders) will agree to start buying bonds. That might bring some relief to the market," said Andrea Williams, who manages 1.2 billion pounds in assets for Royal London Asset Management. Thomson Reuters Peripheral Eurozone Countries Index fell 1.8 percent, reflecting a broad-based sell-off in peripheral equities, but Williams said value could be found in companies deriving earnings from outside the region.
"We have BBVA and Santander, because a lot of their business is overseas in places like Latin America, which is still growing quite nicely," Williams said. "We'd feel more comfortable with Italy over Spain because they haven't had the fiscal restrictions that were needed to sort the economy out."
Sentiment was also hit by concerns over the pace of recovery in the US labour market after weekly jobless claims exceeded expectations. "The S&P 500 ... has now dipped below the psychological 1,300 level. Panic is widespread as there is a worry that the correction cometh," said Will Hedden, sales trader at IG Index. Other heavy fallers in Europe included miners, with the STOXX Europe 600 basic resources index down 3.2 percent, as weak Chinese import data casted doubt on demand for metals after the country posted its largest trade deficit in seven years. Europe's STOXX 600 index currently trades at 10.8 times expected earnings, below a 10-year average of 13.6, according to Thomson Reuters Datastream.