European shares hit three week low as volatility spikes
* FTSEurofirst 300 falls 1.1 percent
* Fears of reduced U.S. monetary stimulus hit banks
* Miners suffer after Glencore, BHP updates
* AXA hit by concerns over equity exposure
By Alistair Smout
LONDON, Aug 20 (Reuters) - European shares hit a three-week low and a major volatility index spiked higher on Tuesday, as expectations hardened that the U.S. Federal Reserve will start to scale back monetary stimulus measures next month.
The pan-European FTSEurofirst 300 index fell 1.4 percent to 1,207.89 points in afternoon trade, marking the index's lowest point in August, led lower by a 2.3 percent drop in banks.
At 1435 GMT, the index traded 1.1 percent lower at 1,211.69 points.
The FTSEurofirst 300 reached a five-year high of 1,258.09 points in late May but has since slipped back on growing speculation that the Fed will soon start to scale back its monthly bond buying programme, which has driven much of the global equity rally this year by hitting returns on bonds.
Minutes from the Fed's July meeting, due out on Wednesday, could indicate whether the U.S. central bank is preparing to start withdrawing stimulus, which could hurt growth-sensitive "cyclical" stocks.
"If the Federal Reserve are to start cutting back on quantitative easing, it would be the financial sector that would take the initial hit, and defensive stocks are doing relatively well today versus cyclicals such as financials," Manoj Ladwa, head of trading at TJM Partners, said, although he cautioned against reading too much into the session's moves.
"The market is very thin at the moment. We've had a few corporate stories, from the likes of Glencore, that are not so great, but volumes down over 10 percent on this time last year, so you expect a few exaggerated moves in the market and a bit of intraday volatility."
The Euro STOXX 50 Volatility Index surged 12.8 percent to 19.73 points, highlighting investor uncertainty over the near-term outlook for financial markets, but volumes were a mere 62.5 percent of an already low 90 day average.
Glencore Xstrata fell 2.3 percent after taking a $7.7 billion hit on Xstrata's mining assets, with fellow basic materials firm BHP Billiton down 1.3 percent after profit missed forecasts.
The cyclical basic resources sector fell 1.7 percent, suffering along with other stocks that are sensitive to economic optimism.
NOT RIGHT TIME
The prospect of reduced Fed stimulus has led to parallel gains in core sovereign debt yields that have made stocks less attractive to investors.
Concern over the outlook for stock markets hit insurer AXA , down 4.7 percent and the top FTSEurofirst faller, with investors worried about its exposure to the asset class.
British insurer Prudential fell 4.1 percent.
However, Swiss bank Reyl's chief investment officer, Francois Savary, categorised the current pullback as a "consolidation" as investors book profits on this year's rally, rather than a more serious stock market collapse.
"The short term is shaky, but we should still finish the year higher," he said.
Savary said he remained optimistic on the longer-term outlook for European equities due to signs that the region's economy is recovering from the euro zone's sovereign debt crisis.
He was considering adding to his European equity exposure, but felt now was not the right time as the market retreat was "not advanced enough".