European equities fell in early trade on Wednesday, losing ground for the second day in a row as banking shares tracked declines suffered by their U.S. peers overnight on rekindled worries over credit losses.
But the losses were limited by gains in mining stocks, recovering from recent sharp losses along with metal prices.
Rio Tinto rose 2.7%, Xstrata added 4.1% and BHP Billiton gained 2.9%.
At 0811 GMT, the FTSEurofirst 300 index of top European shares was down 0.9% at 1,198.55 points. The index lost 0.3% on Tuesday.
U.S. banking shares tumbled overnight on news that JPMorgan Chase has racked up $1.5 bln of losses so far this quarter on mortgage-linked assets, sending its stock down more than 9%.
Goldman Sachs also weighed after a number of analysts cut their earnings estimates for the investment bank, sending its stock down 6%.
Royal Bank of Scotland dropped 4.4%, Societe Generale sank 5%, Credit Suisse shed 2.7%, and Banco Santander fell 2.3%.
Dutch financial group ING fell 0.5% after posting a quarterly net profit that beat estimates.
"Credit fears are rising again after the news from JPMorgan. It started yesterday in Europe, and with the fall on Wall Street overnight, that will weigh today," said Benoit De Broissia, analyst at Richelieu Finance, in Paris.
Banking shares have been hit over the past year by fears over the impact of a debacle in the risky U.S. subprime mortgage market that has forced financial institutions to unveil massive asset writedowns and arrange emergency capital injections.
The DJ Stoxx banking index, down 2.9% on Wednesday, has lost 29% so far in 2008, the worst performance among European sectors.
The broad FTSEurofirst 300 is down 20% so far this year, but has gained nearly 10% since reaching a floor in mid-July, helped by a sharp drop in oil prices and a weakening euro versus the U.S. dollar, which makes it easier for European exporters such as industrial firms and automakers.
RECESSION FEARS
But economic concerns are rising. Japanese shares fell sharply on Wednesday on data that showed Japan's economy contracted in the second quarter at its sharpest rate in seven years, fuelling fears that the world's No.2 economy has slipped into a recession.
"To really get a sustainable rally, macroeconomic worries would have to ease. But it doesn't look like this will happen soon, at least not in Europe where people have started to talk about recession in a number of countries," Richelieu Finance's De Broissia said.
Quarterly GDP figures for the eurozone are expected on Thursday morning, but investors will first look into U.S. retail sales data for July, due on Wednesday at 1230 GMT, to see if the recent sharp drop in oil prices has helped revive consumer spending.
Dallas Federal Reserve Bank President Richard Fisher added to negative sentiment on Tuesday by saying the U.S. economy was in a prolonged period of slow growth and could shrink later this year.
