European shares fell by midday on Tuesday, wiping out all gains for the month as worries about the future of the top U.S. home finance groups lengthened the shadow that a year-long credit crunch has cast on global equities.
At 1054 GMT, the FTSEurofirst 300 index of top European shares was down 1.5% at 1,171.66 points, on track for its seventh month of losses this year.
Financials were the biggest drag on the index, accounting for nearly half of the index's fall, after a Barron's report that suggested the U.S. government may have no choice but to effectively nationalise mortgage finance groups Freddie Mac and Fannie Mae. UBS fell 4%, Societe Generale lost 3.2% and Barclays 4.5%, while poor results from Danish insurer Trygvesta weighed additionally on insurers.
Axa fell 3.9% while Legal & General and Prudential both lost 4.4%.
Analysts said the economic situation in Europe continued to be grim and more bad news on financials would not help, but a large amount was already discounted with the FTSEurofirst having fallen 22% this year.
"A lot is already in the price — you've got a negative day today and you might have a positive day tomorrow. We expect European equities to end the year pretty much around these levels," said Heinz Gawlak, head of asset management at Generali Investments Deutschland at Cologne in Germany.
"Stock markets anticipate, and there's a certain oversold level out there," he said, but added that the economic picture remained bleak.
Crude oil fell 75 cents to $112.12 a barrel, hitting Total, Royal Dutch Shell and BP, which fell 0.4-1.4%.
But data from Germany showing producer price inflation hit its highest in 27 years highlighted the fact that even a 23% decline in oil from mid-July's record highs leaves crude futures 17% above where they were this time last year.
"This is a reminder that one should be cautious about how much in terms of future inflation relief one should read into the recent drop in the oil prices," said Tammo Greetfeld, a strategist at UniCredit in Munich, Germany.
Across Europe, Britain's FTSE fell 0.9%, while Germany's DAX lost 1.2% and France's CAC fell 1.4%.
Asian shares fell to a two-year low while stock weakness seemed set to continue in the United States, with futures for the Dow Jones industrial average, the Nasdaq 100 and the S&P down 0.3-0.4%.
CIBA SINKS
Many strategists feel Europe's companies are going to struggle as the economy slows, whether or not input costs stay at elevated levels, and analysts are cutting forecasts regularly.
Underlining the difficulties faced by the region's corporate sector, Swiss specialty chemicals group Ciba plummeted 17% after it posted a first-half net loss and said it was considering selling two businesses.
"Absolute shocker, even worse than (the) Q1 profit warning," said a trader.
Among the standout gainers in a sea of red was British medical device maker Smith & Nephew which gained 3.2% as investors saw as positive for the sector bid speculation around U.S. rival Zimmer Holdings.
Gas producer BG Group gained 1.7% as Australia's Origin Energy reiterated its shareholders should reject the BG's $11.9 bln bid.
But overall the tone was overwhelmingly negative.
"I'm still quite pessimistic," said Heino Ruland, a strategist with FrankfurtFinanz in Frankfurt.
"I am still sticking to the view to stay overweight bonds, neutral cash and underweight equities.
The pan-European benchmark was little changed by Germany's ZEW survey, which showed a bounce back in German investor sentiment, and by the euro falling to a six-month low against the dollar.
U.S. producer price inflation numbers are due at 1230 GMT.
