Inflation worries take a chunk out of Europe shares

By Amanda Cooper

LONDON, May 20 (Reuters) - Crude oil at new record highs and worrying inflation data on both sides of the Atlantic forced European shares into their largest one-day slide in two months on Tuesday.

Mining stocks, which pared some of their recent gains, and banks were the largest drags on the European equity market, which came under pressure after data showed troubling increases in wholesale inflation in the United States and Germany.

In Europe's largest economy data also showed investor expectations for the economy deteriorated by more than expected.

Crude oil hitting a new high above $129 a barrel CLc1 fed by bullish investment bank forecasts added to the concern among investors that persistent price pressures will curb the ability of central banks to loosen monetary policy to protect economic growth.

The FTSEurofirst 300 index of top European shares ended 2 percent down at 1,350.54, making this its worst one-day fall since March 17, when the index hit a 2-1/2 year low. "The next move for the market is going to be down and we're going to have a look at the mid-March lows probably," said Andrew Lynch, a portfolio manager at Schroders.

"Knock on wood we don't go through (those lows), simply because there was so much fear and panic around two months ago ... we're not in as bad a situation, but we are by no means out of the woods," Lynch said.

"The central banks have put in the facilities to ensure banks aren't going to go bust for liquidity reasons. But they can't really cut interest rates because inflation is still too high for that, and so I fear that the cycle of capitalism is going to have to take its course and we're going to have to start using swear words like 'recession'."

The FTSEurofirst is still up about 13 percent from the lows of mid-March, but has shed 10 percent so far this year.