Sluggish German GDP derails European stock rebound

Tue Aug 16, 2011 4:37am EDT

* FTSEurofirst 300 down 1.5 pct, Euro STOXX 50 down 1.7 pct

* German stocks drop as GDP growth disappoints

* Italian banks rally as ECB seen buying more bonds

* Investor sentiment at lowest since 2009 -BofA Merrill

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By Blaise Robinson

PARIS, Aug 16 (Reuters) - European stocks fell on Tuesday, halting a rebound that started last week, as investors fretted about tepid German GDP growth ahead of talks between German and French leaders on the euro zone debt crisis.

At 0811 GMT, the FTSEurofirst 300 index of top European shares was down 1.5 percent at 954.55 points.

Data showed German GDP growth slowed more than expected in the second quarter, dropping to 0.1 percent in seasonally adjusted terms from a revised 1.3 percent in the first three months of the year.

"This is a serious disappointment," West LB economist Joerg Lueschow said. "Many growth forecasts will now likely be lowered and we will do so too. This does not provide any positive signs for euro zone GDP. We cannot expect more than stagnation now."

With French data last week signalling a stagnated economy in the second quarter, the weak German figures suggested the 0.3 percent forecast for euro zone growth, due at 0900 GMT, could turn out to be too optimistic.

Germany's surprisingly weak data dragged down the euro, while German stocks featured among the top losers, with the DAX down 2.4 percent.

BMW lost 3.2 percent, Infineon (IFXGn.DE) dropped 3.8 percent and Bayer (BAYGn.DE) fell 2.9 percent.

The euro zone's blue chip Euro STOXX 50 index was down 1.7 percent at 2,285.42 points. The index had managed to surged 12 percent from a bottom hit last Thursday, but failed to break above a key resistance level on Monday, the 38.2 percent Fibonacci retracement of the index's recent 26 percent slump, at 2,351.91 points.

FURTHER MEASURES

On the downside, the index's next support level is at 2,246.86 points, which represents the 23.6 percent retracement of the recent sell-off.

Around Europe, UK's FTSE 100 index was down 1.3 percent, France's CAC 40 down 2 percent, Spain's IBEX down 1.5 percent and Italy's FTSE MIB down 1.7 percent.

French President Nicolas Sarkozy and German Chancellor Angela Merkel were due to meet in Paris later in the day to explore further measures that could be taken to tackle the euro zone's debt crisis. A joint news conference is due at 1600 GMT.

Officials in Paris and Berlin have said the talks would not address the possibility of issuing joint eurobonds, seen by a number of experts as the best solution to stop the crisis.

"Tonight's meeting between Chancellor Merkel and President Sarkozy could also be critical with the debate about common bonds gaining momentum of late," Commerzbank analysts wrote in a note.

"Official guidance has tried to keep expectations low, but in the current environment, markets are more likely to think that there is no smoke without a fire. One should rather look for hints on how the implementation and effectiveness of the new EFSF might be fostered."

European banking stocks lost ground, with Societe Generale down 2.2 percent and Deutsche Bank (DBKGn.DE) down 2.2 percent.

But Italian banks bucked the trend, with Mediobanca up 3.1 percent and Banco Popolare up 1.5 percent as the European Central Bank was seen buying Italian bonds again in an effort to stop the contagion from the debt crisis.

According to BofA Merrill Lynch's monthly fund management survey, European investor sentiment has sharply fallen, with the readings of economic growth and corporate earnings outlook dropping to levels not seen since March 2009.

"While this mirrors moves in other regions -- notably the U.S. -- sentiment in Europe is now much the worst of any region and this looks overdone -- potentially setting the stage for an equity rebound, particularly viewed together with the high cash levels seen in the global survey, which have triggered our contrarian buy rule," Merrill Lynch wrote in a note.

(Reporting by Blaise Robinson; additional reporting by Dominic Lau in London and Berlin newsroom; Editing by Erica Billingham)

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