European shares went into reverse on Friday after two days of gains as concerns over euro zone sovereign debt returned with a vengeance, taking a toll on banks, which led the market lower. Italy's UniCredit topped the FTSEurofirst 300 fallers' list, down 6 percent, followed by French lender Societe Generale, which lost 5.8-percent as mounting fears of a possible Spanish bailout dealt market sentiment a sharp blow.
"It is hard for the market to rally when the European bank sector keeps being under huge pressure. It tells us that the problems have not been solved; they have only been postponed," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets. Madrid's IBEX 35, which sank 3.6 percent to a three-year low, was the worst hit index across Europe.
Yields on Spain's 10-year bonds rose and the cost of insuring its debt against default breached 500 basis points for the first time as record borrowing by Spanish banks from the European Central Bank underscored fears about national finances. "I maintain that Spain is going to be a concern, but I'm working on the assumption that things won't deteriorate to quite the extent that markets think," Peter Dixon, economist at Commerzbank, said. "On the assumption that many European companies, particularly those exposed to the international cycle, continue to do okay - to generate reasonably decent numbers - I don't necessarily think you want to dump stocks right now."
Stocks in the DJ STOXX 600 are expected to see their earnings per share on average grow by 4 percent this year, and 13 percent next year, according to Thomson Reuters estimates. The FTSEurofirst 300 index of top European shares closed down 16.46 points, or 1.6 percent, at 1,027.73, dropping 2.3 percent over the week - its fourth consecutive weekly loss.
Mining stocks came under pressure after data showing a dip in US consumer sentiment, which compounded worries about the strength of the world's biggest economy, and had a detrimental effect on the demand picture for metals. Providing further evidence of increased investor nervousness, European share index volatility, as measured by the Euro STOXX 50 Volatility index, or VSTOXX, rose 6.5 percent. The underlying Euro STOXX 50 was down 2.6 percent on the day, wiping out its gains for the year.