European shares fall on debt yield worries

LONDON (Reuters) - European shares hit new five-week lows on Friday, on mounting worries that borrowing costs in several euro zone countries are at unsustainable levels, and policymakers are not acting to stem the region's debt crisis.

The European Central Bank tried to contain yields by buying bonds.

At 0939 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was down 0.2 percent at 956.01 points and had dropped to 949.09, its lowest level since October 10 and below its 50-day moving average, a bearish signal.

The index is on course to fall about 3 percent over the week, with high sovereign bond yields remaining a major focus for the market. Spanish yields hit a euro-era high at an auction on Thursday.

Most sectors fell, with the heavyweight banking sector among the losers. The STOXX Europe 600 Banking Index .SX7P fell 0.3 percent, and has lost more than 36 percent in 2011, as banks take writedowns on exposure to euro zone peripheral debt.

"The focus has very much moved toward the core of Europe, away from the periphery. Italy's in question. France is in question," Daniel McCormack, strategist at Macquarie, said.

"It really has pushed the sovereign crisis into a much more dangerous phase. You should have some kind of overweight in defensives, and avoid financials."

Mining stocks were the biggest fallers, with the STOXX Europe 600 Basic Resources Index .SXPP down 1 percent, on worries the euro zone debt crisis will spark a recession in Europe and elsewhere, hurting demand for metals.

ECB BUYING BONDS

The European Central Bank is trying to contain yields by buying bonds. Italian 10-year bond yields were below 7 percent on Friday and the spread of Italian 10-year bond yields over their equivalent German Bunds narrowed to fall below 500 basis points after traders said the ECB was buying Italian government bonds.

But strategists said the ECB needed to buy more bonds, and that policymakers would have to address the fundamental nature of the makeup of the euro.

Political uncertainty is also worrying investors, as governments across Europe undergo changes of leadership, in some cases promoted by the financial crisis.

Italy is facing a serious emergency, new Prime Minister Mario Monti said on Thursday, as he promised rigor and fairness in painful reforms to dig the country out of a financial crisis that threatens the entire euro zone.

"Equity markets should be sending an even stronger signal to the European establishment. It's not going to end just by reintroducing a bit of political stability into Greece and Italy, and putting technocratic governments into power," said Lothar Mentel, chief investment officer at Octopus Investments, which manages $4 billion.

"I'm surprised equities have not reacted even more strongly to what has happened in the bond markets,"

"It has the hallmark of a classic liquidity crisis across Europe, where you see countries that are perfectly solvent all of a sudden with yields that aren't based on any rational argument."

(Editing by Jon Loades-Carter)