PARIS European stocks ended lower on Thursday, losing ground for the fourth time in five sessions as Moody's warning on U.S. debt and rising Italian bond yields despite a well-bid debt auction rattled investors.
The FTSEurofirst 300 .FTEU3 index of top European shares closed 0.9 percent lower at 1,089.35 points.
The euro zone's blue chip Euro STOXX 50 .STOXX50E index fell 0.7 percent at 2,695.29 points, breaking below a key support level at 2,707, which represents the 23.6 percent Fibonacci retracement of the index's drop from a high in early May to a low hit earlier this week.
The two benchmark indexes have lost about 6 percent and 11 percent respectively over the past 2-1/2 months, as reignited fears of a Greek debt default and contagion from the euro zone debt crisis to other countries prompted investors to dump risky assets such as equities.
Agilis Gestion fund manager Arnaud Scarpaci said the pull-back was overdone.
"A lot of dark scenarios have been priced in by the market already, so I think it's better to be invested at this point. We might lose another 2 to 3 percent, but the upside potential of a relief rally is about 8 to 10 percent, and it's going to happen very quickly," he said.
"Italy's woes over the past week has been a side show. The real indicator is the Spanish bond yields. As long as they stay below 7 percent, we're fine. Also, it's clear that a Greek solution is imminent, and corporate earnings will calm investors, just look at JPMorgan's."
U.S. bank JPMorgan Chase & Co (JPM.N) posted a higher-than-expected rise in quarterly profit on Thursday as it wrote off fewer bad mortgages and credit card loans, sending its shares up 2.6 percent.
STRESS TESTS EYED
But the results failed to spark a rally in the European banking sector index .SX7P, stuck in a downward channel since mid-February in which it has tumbled 25 percent, dragging its 12-month forward price-to-earnings ratio (P/E) to 7.5, a level not seen since March 2009.
Investors' focus was instead on stress test results from 90 banks from 21 countries, due after European markets close on Friday and expected to shed light on sovereign bond holdings and funding costs.
The FTSEurofirst 300 could break below the year's low hit in March if "a significant number of banks don't pass the stress tests and the IPO of Bankia in Spain doesn't go through," said Gavin Launder, fund manager at Legal & General.
Credit Agricole (CAGR.PA) lost 2.4 percent, Credit Suisse CSGN.VX fell 1.1 percent and Dexia (DEXI.BR) shed 1.5 percent.
Investors were also rattled by the fact that Italy had to pay the highest interest rates in three years to sell almost 5 billion euros of long-term debt on Thursday, highlighting the growing pressure on its public finances.
(Reporting by Blaise Robinson; Editing by Jon Loades-Carter)