Europe stocks extend losses on jitters over Italy

Mon Jul 11, 2011 8:37am EDT

* FTSEurofirst 300 down 1 pct, Euro STOXX 50 down 2.2 pct

* Peripherals among most hit as Italian debt fears rise

* Italian regulator introduces short-sell disclosure

* For up-to-the-minute market news, click on

By Blaise Robinson

PARIS, July 11 (Reuters) - European shares dropped on Monday, as mounting signs the region's debt crisis was spreading to Italy hammered euro zone peripheral stocks, taking a key stockmarket index to a two-week low and below an important support level.

Shares of financial institutions were among the worst hit, with Portugal's Banco Espirito Santo losing 4.9 percent, AXA dropping 5.2 percent and Banco de Sabadell down 4.6 percent.

French banks, which have a significant exposure to Italy, were also among the top losers, with BNP Paribas falling 4.5 percent and Societe Generale down 4.2 percent.

At 1200 GMT, the Thomson Reuters Peripheral Eurozone Countries Index was down 3.9 percent while the Thomson Reuters Peripheral Eurozone Banks index tumbled 4.5 percent.

The wider FTSEurofirst 300 index of top European shares was down 1 percent at 1,102.90 points.

Italian banks remained weak, with Intesa Sanpaolo down 5 percent, despite new disclosure requirements from Italian market regulator Consob on short positions unveiled on Sunday.

"Apparently big macro hedge funds shorted Italian banks in order to defend and enhance their long Bund vs short BTP (Italian government bonds) trade performance. There is serious money in that trade," Mediobanca analysts wrote in a note.

The 10-year yield spread between Italian and German debt widened to a fresh euro-era high on Monday, with the Italian/German 10-year yield spread 14 basis points wider at 258 bps, as BTP futures FBTPc1 tumbled more than 100 ticks to 103.29.

"Shorting Italian banks is an indirect and easy way to affect Italian BTP spread. Normally we see the credit market affecting the equity in the banks sector. This time is the other way around," Mediobanca analysts wrote.

Unicredit -- which tumbled nearly 20 percent last week -- was down 1.7 percent, UBI Banca down 1.1 percent and Banco Popolare down 3.3 percent.

KEY SUPPORT LEVEL

The euro zone's blue chip Euro STOXX 50 index dropped 2.2 percent to 2,728.88 points, falling to a level not seen since late June and breaking below a key support level at 2,772 points, which represents a 23.6 percent Fibonacci retracement of the index's fall from a May high to a June low.

"A number of technical signals show that the index has reached a top on July 1 at 2,887.30 points, and with the return of the downward momentum, the index could test the support level of 2,692 points (the year's low hit in June) in the next few sessions," said Alexandre Le Drogoff, technical analyst at Aurel BGC in Paris.

The Euro STOXX 50 volatility index , one of Europe's main barometers of anxiety, jumped 16 percent to a level not seen since late June, signalling a rise in investors' aversion for risky assets.

European Council President Herman Van Rompuy called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday, while German Chancellor Angela Merkel said Italy needed to demonstrate it was undertaking the budget reforms needed to restore confidence in the euro zone.

"Investor sentiment is on the back foot this morning," Charles Stanley strategist Jeremy Batstone-Carr said.

"Nobody knows where this is going to stop and when the next domino will fall, but you can't stop investors from speculating despite the typical arm-waving on the part of the European officials on what they regard as the intrusive influence of hedge funds. Italy is in a different order of magnitude from Greece, Portugal and Ireland and takes the crisis to a whole new level."

Around Europe, UK's FTSE 100 index was down 1.2 percent, Germany's DAX index down 2.2 percent, and France's CAC 40 down 2.3 percent.

(Additional reporting by Dominic Lau and Brian Gorman in London. Editing by Jane Merriman)

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