Nerves ahead of ECB halt European share rally
* FTSEurofirst 300 down 0.2 percent
* Fears mount that central bank action expectation overdone
* UBS, BP sharp fallers after Q2 results
By Tricia Wright
LONDON, July 31 (Reuters) - A three-day rally in European shares halted on Tuesday, dented by concerns that markets have overplayed the chances of the European Central Bank taking action to back up its pledge to support the euro.
Expectations that the ECB would start buying Spanish and Italian bonds again after a meeting this Thursday were triggered last week by promises from the bank's president Mario Draghi to do "whatever it takes" to defend the euro.
German Chancellor Angela Merkel and French President Francois Hollande have repeated that mantra but many analysts have warned from the start that the ECB may not yet have a clear mandate for bold action from Berlin.
A Reuters poll on Monday showed 19 of 24 euro money market traders believed the ECB would revive its bond-buying programme, but only 10 said the bank would do so on Thursday.
"The odds for disappointment are fairly elevated given the adamant statement from Draghi last week," Franz Wenzel, strategist at AXA Investment Managers, said.
"Markets have been positioning for something fairly big to come - whether he's going to deliver on Thursday or not remains to be seen. In that sense we think some short-term profit taking might take place."
The FTSEurofirst 300 was down 0.2 percent at 1,070.66 by 1102 GMT, having soared more than 5 percent in the previous three sessions in a rally sparked by Draghi's pledge.
"Clearly if we don't get something concrete from the ECB then all bets are off, and markets will be very disappointed," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets, said. "But let's say Draghi puts his money where his mouth is... I would say that we should have a fairly solid month of August."
"Maybe Thursday... we'll get some 'buy the rumour sell the fact'. But after, if people realise that central banks will basically flood the markets with liquidity - typically risky assets go up in that type of environment."
Ahead of the ECB meeting, investors were faced with a raft of earnings news.
UBS topped the FTSEurofirst 300 fallers' list, off 4.9 percent, after reporting a shock slump in profit as a drop in trading pushed its investment bank into the red from the previous quarter and it took a big hit on Facebook's glitch-ridden stock market debut.
Trading volume in UBS was robust, at 79 percent of the 90-day daily average.
Rival Deutsche Bank, which saw second-quarter profit plunge at its investment bank, hit by the euro zone debt crisis, traded 0.6 percent lower.
BP, meanwhile, was left nursing a 4.3 percent fall after delivering the worst of a poor set of quarterly results among top oil companies, slashing $5 billion off the value of U.S. assets and undershooting expectations with its operating result.
BP also saw solid trading volume, at 89 percent of the 90-day daily average.
"Even after stripping out major write-downs on U.S. shale gas and the Liberty project in Alaska, these results are a significant miss and are likely to disappoint the market," RBC Capital Markets said in a note.
Of the 44 percent of European companies to have reported so far, 47 percent have fallen short of expectations, according to Thomson Reuters Starmine data.
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