(Updating with full report)
LONDON (Thomson Financial) - Leading European shares ended lower but off their worst levels, helped by modest morning gains on Wall Street, with Nestle a notable riser after the food giant posted strong results, announced a share buyback and lifted its guidance.
The financial sector, however, continued to struggle on investor uncertainty on how to best assess the exposure of banks, hedge funds and insurers to the failing US subprime mortgage market.
The Dow Jones STOXX 50 Index was down 2.31 points, or 0.06 pct at 3,665.72, but off a session low of 3,619.33.
The broader DJ STOXX 600 Index dipped 0.98 point, or 0.3 pct to 365.36.
Volume was thinner than usual, with the Vienna and Milan markets closed for a public holiday, and bank holidays across a number of Euronext markets.
'We lifted our exposure to the equities last week because we're not under the impression it (the subprime crisis) will have an enormous impact on the US economy and the American consumer,' said Thierry Lacraz, equity advisor at Pictet & Cie.
'At the levels we're at, valuations are relatively low, and even more so that rates have fallen. If one has to make a choice between bonds and stocks, we tend to prefer stocks.'
Lacraz said the current volatility in the market is caused by investor reaction to press releases from financial institutions detailing their liabilities as regards the subprime market.
'In time, the impact of these annnouncements is likely to ease.'
In Europe, strategists are looking for further clues on the next moves from Europe's central banks.
'The most interesting event of the session could be the Norgesbank meeting and statement,' ABN Amro told clients.
'A decision to not hike rates would act as a signal that other G10 Central Banks also in the midst of a rate hike cycle might also move into a holding pattern.'
Earlier, a dovish set of minutes from the Bank of England and an unexpected fall in UK earnings growth added to a growing conviction among strategists that UK rates have peaked at 5.75 pct.
ABN Amro, though, said that the BoE would have to be convinced that recent market stress will continue before calling a halt to rate hikes.
For the moment at least, there seems little doubt, with European markets all weaker again and financials feeling the worst of ongoing credit crunch concerns.
Eight out of the ten top decliners on the DJ Euro STOXX 50 were financial plays.
Societe Generale led the fallers, sliding 2.3 pct, even as the French bank denied market rumours of heavy losses at its Lyxor Asset Management fund.
'There are suspicions surrounding all the banks,' said one Paris dealer. 'The market suspects that there are other funds in difficulty,' he said.
It is 'too early' to resume buying banking stocks, he added. Another agreed that 'everyone will have funding problems at the moment.'
Among other notable decliners, Ing Groep dropped 1.9 pct, ABN Amro slipped 1.6 pct, BBV Argentaria was off 1.6 pct while BNP Paribas was down 1.5 pct.
In the UK, the banking sector was further depressed as Standard Chartered, Barclays, Royal Bank of Scotland and HSBC all traded ex-dividend. Shares were down 2.3 pct, 0.7 pct, 2.2 pct and 1.3 pct respectively.
Nestle was a bright spot out of the gate. The Swiss food giant's shares stormed 9.5 pct higher after it reported a better-than-expected set of half-year results, announced a 25 bln sfr buyback and raised its full year guidance.
Nestle's solid results and the attractiveness of the consumer staples sector in times of market volatility, also boosted shares in Anglo-Dutch food and household products group Unilever, which rose 1.55 pct.
E.ON recovered from early weakness to end up 1.2 pct as investors chose to focus on the German utility's reiteration of its full-year outlook over its second-quarter results that came in at the low end of some analyst estimates.
'The second-quarter numbers in themselves may not set the heather on fire but represent a modest quarter in what we expect to be a solid year of progress,' Merrill Lynch said in a note to customers.
Other blue chip fallers included Carrefour -- down 1.6 pct -- which was dragged down by US giant Wal-Mart's gloomy outlook yesterday.
France Telecom -- up 1.3 pct -- added to gains yesterday after internet reports this week that the French incumbent's Orange unit is close to securing a deal with Apple to sell the iPhone in France.
Volkswagen added 1.1 pct, with traders pointing to rumours Porsche AG might be considering raising its stake in Europe's largest auto maker.
Also in M&A, Bayer surged 5.5 pct on vague market speculation that Swiss pharmaceutical group Novartis may be considering a bid for the group, but analysts and dealers gave short shrift to the rumour.
'Funding a deal at the moment would be very difficult. The banks just aren't there to give you the money,' said a London-based trader. Mark.cotton@thomson.com mc1/slm COPYRIGHT Copyright AFX News Limited 2007. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News.
© 2007 AFX News
