Europe stocks drop to 3-wk low on credit woes, oil

European shares fell to a three-week low early on Thursday, erasing gains made in the previous session, as a rising oil price revived inflation concerns while banks fell on renewed credit worries.
IKB jumped 10% on news that U.S. private equity firm Lone Star was to take a 90.8% stake in the lender, Germany's most prominent casualty of the subprime crisis.
At 0807 GMT, the FTSEurofirst 300 index of top European shares was down 1.1% at 1,152.47 points. The index gained 0.5% on Wednesday.
Banks were among the biggest losers, with HBOS down 1.9%, Fortis down 2.5% and Royal Bank of Scotland down 2.1%. The DJ Stoxx banking index was down 1.6%.
"The price of oil is going up again, so oil-related stocks might do well but that's a different story for the broad market," said Rik Zwaneveld, trader at AFS Brokers, in Amsterdam.
"Inflation fears are back, on top of worries surrounding the fate of Freddie Mac and Fannie Mae, fears of additional writedowns, etc. etc. People are getting nervous again."
Investors dumped shares of Fannie Mae and Freddie Mac on Wall Street overnight on fears of an imminent government bailout of the two big mortgage companies.
Adding to the negative sentiment in the banking sector, The Financial Times said that Lehman Brothers had held talks to sell up to 50% of its shares with China's CITIC Securities as well as with state-owned Korea Development Bank, but both investors walked away saying the price was too high. CITIC said it had held no formal talks about buying a stake.
Banking shares have been hammered over the past year by worries over the credit crisis that has forced financial institutions to make massive asset writedowns and seek emergency capital increases.
The FTSEurofirst 300 has lost 24% so far in 2008, while the DJ Stoxx banking index has dropped 34%.
Mining was the only sector on the rise, gaining ground along with metal prices. Anglo American rose 2.1%, Xstrata gained 2.8%, and Eramet added 2.4%.
Kazakh miner Eurasian Natural Resources rose 4.3%, boosted by strong first-half results, and after the company said it will keep looking for takeovers, especially in China, and this will not be made difficult by an increased stake of 25% held by rival Kazakhmys.
Around Europe, Germany's DAX index was down 1.1%, UK's FTSE 100 index down 0.8% and France's CAC 40 down 1.2%.
Gemalto, the world's largest provider of smart cards, gained 7% after posting forecast-beating adjusted first-half operating income and lifting its forecast for earnings in the full year.
Merck KGaA gained 1.2% after UBS started the German drugmaker with a "buy" rating and a price target of 100 euros, traders said.