Economic fears hit European stocks

LONDON, England (Reuters) -- European stock markets fell sharply in late trade on Monday, as economic worries refused to go away and as shares in Swedish telecom gear maker Ericsson slumped on poor broker comment and financing fears.

Also hit were beat-up insurers as fears over a possible fire sale by a key Swiss investor added to existing worries about the withering impact of the bear market on their holdings, while the basic resource sector fell after Norwegian paper group Norske Skog painted a bleak outlook and steel maker Corus was thumped by Brazil concerns.

Strategists advised investors to rejig their portfolios to include fewer economically-sensitive stocks such as basic resources after U.S. data again showed activity easing up in the world's biggest economy, but said investors should stay calm because share valuations were increasingly attractive.

"We need to see a few months of data before we start getting too bearish," said Martin Brooker, pan-European equity strategist at E+TRADE Securities.

"With many investors squared up for the August holidays we probably will not see the flows pick up until September, but you can still find enough value in the market to justify a reasonable weighting in equities."

The FTSE 100 index finished the session down 79.1 points, or 1.9 percent, at 3,996.4.

By 1555 GMT, with only Frankfurt officially trading, the FTSE Eurotop 300 index of pan-European blue chips was three percent while the narrower DJ Euro Stoxx 50 index was 3.7 percent weaker.

Declining stocks outnumbered the fallers by nine-to-one.

The FTSE Eurotop 300 is about eight percent higher than the five-year intra-day low plumbed on July 24 but is down nearly 30 percent for the year to date.

The U.S. Institute for Supply Management on Monday said its monthly non-manufacturing index fell to 53.1 in July from 57.2 in June, down from a nearly two-year peak of 60.1 in May.

That followed a weak showing by the U.S. manufacturing sector on Friday, which hit markets hard and compounded last week's poor figures on jobs, GDP growth and consumer confidence.

"There's an awful lot of news around about a renewed slowdown and that is a definite change to the situation a month or so ago," said Jeremy Podger, European equities fund manager at Investec Asset Management.

In New York, the Dow Jones industrial average slipped 1.7 percent and the Nasdaq Composite eased 1.9 percent.

Shares in telecoms gear maker Ericsson dived 17.2 percent to 7.70 Swedish crowns, stung by negative comment from both Deutsche Bank and CSFB.

Deutsche lowered its target price for Ericsson and CSFB cut its fair value estimate to seven crowns from 10 crowns.

One analyst also cited belated ratings concerns following the recent decision by Moody's and Standard & Poor's to downgrade the group's debt to "junk status."

"We could be seeing a delayed reaction to the debt downgrades, which has increased the cost of Ericsson's debt, and the implications it has on the company's cash on its balance sheet," said Sofia Ghachem at UBS Warburg.

Shares in Swiss insurance giant Zurich Financial slumped 9.9 percent in a feeble Swiss market weighed down by uncertainty over the BZ Group, owned by maverick billionaire Martin Ebner.

Last week Ebner unexpectedly sold control of four publicly traded funds amid talk of a liquidity crisis.

That raised fears that BZ might have to sell its direct stakes in companies including engineering group ABB, bancassurers Credit Suisse and Baloise. knocking their shares down between seven and nine percent each.

Meanwhile, shares in Norske Skog fell 6.6 percent after the world's third-largest maker of publication paper followed most of its main rivals in posting weak -- albeit better-than-expected -- results due to the economic slowdown.

"Norske Skog cannot, today, see clear signs of an upturn for the company's products on the most important markets," the company said in a statement.

Mining stocks also fell heavily as investors pared back their expectations for future metal demand due to the shaky economic backdrop.

Anglo-Dutch steel maker Corus led the way south with a loss of 12 percent, further burdened by its exposure to crisis-threatened Brazil, home of prospective merger partner CSN.

Diversified miner Anglo American shed more than seven percent of its value as investors continued to fret over controversial South African draft mining charter threatening its participation in new projects.

BHP Billiton and Rio Tinto shed 4.7 percent and 5.3 percent respectively.

European markets skidded lower in midday trading on Monday, with London and Frankfurt racking up triple-digit losses, amid fears that the global economic recovery is stalling.