LONDON European shares fell on Wednesday for the second consecutive session as euro zone purchasing managers data suggested the region could tip into recession and potentially have a knock-on effect to company profits.
Investor sentiment took a hit after the Markit's Eurozone Services Purchasing Managers' Index (PMI) missed forecasts, raising questions about whether Greece can recover from its economic slump and implement the austerity measures required under its fresh bailout programme.
"The PMIs suggest there is going to be a slow period of economic growth, which opens the danger of weak profits," said Richard Batty, strategist at Standard Life Investments, which has $248.37 billion of assets under management.
Greece, which received its long-awaited bailout deal early this week, was also knocked by Fitch downgrading its long-term ratings following its debt swap plan for private creditors.
The Athens General exchange was the worst performing on the budget cuts and Fitch downgrade worries, with its main index .ATG falling 5.7 percent in strong volume at 158.3 percent of its 90-day daily average.
Volume was brisk in Greek banks .FTATBNK which were the hardest hit on the index, falling 12.7 percent, on concerns they will have to raise more capital than expected after the debt swap plan is implemented.
EFG Eurobank EFGr.AT, Alpha Bank (ACBr.AT) and National Bank of Greece (NBGr.AT) were the standout losers, down 12.7 to 17.1 percent.
Greek banks have helped boost the Athens General exchange 10.5 percent this year as relief grew that they would escape nationalization.
"There is skepticism over Greece and whether they can deliver the budget cuts, the country has only got through a short-term funding crisis and this does not solve the longer term problems. We are underweight European equities," Batty said.
Banks which have heavy exposure to euro zone sovereign debt were also among the standout losers in Europe, with Banco Popular (POP.MC) falling 4.1 percent in volume three fold its 90-day daily average.
Asset returns in 2012:
Euro zone debt crisis in graphics:
Portugal, Italy and Ireland bond spreads:
The pan-European FTSEurofirst 300 .FTEU3 index of top shares closed down 0.8 percent at 1,077.07 points for the second day after gaining 1.8 percent last week, although volume was low at 81.4 percent of its 90-day daily average.
The most actively traded stock, however, was on the upside. Peugeot Citroen (PEUP.PA) jumped 11.6 percent in volume sevenfold its 90-day average after sources said the car maker was in discussion with General Motors (GM.N) to form a broad manufacturing alliance.
Traders said short sellers cutting their positions in PSA were another factor behind the sharp rise.
PSA was the fourth most shorted stock on France's CAC 40 .FCHI, according to Data Explorers, with nearly 7 percent of the company's shares out on loan, while buy-and-hold investors have been favouring rival Renault (RENA.PA).
Colin McLean, managing director at SVM Asset Management in Edinburgh, said he was also investing in stocks which had the potential for a short-squeeze and had Weir Group (WEIR.L) in his portfolio.
"The company has been shorted due to concerns in the U.S. about the gas price, but we expected this is overdone and Weir will report better trading," McLean said.
He said buyers would also be encouraged back into the market
by high dividend yields and bullish technical signals, with major indexes like the German DAX .GDAXI showing a 'golden cross' when the 50 day moving average crosses its 200 day moving average.
The signal confirms a shift in mid-term momentum and usually means gains in the index six months down the road.
"The golden cross points to some momentum for the market and there are a number of investors still in cash, which we could see flowing back into the market," McLean said.
He said high dividend stocks would be the best investment and he had invested in Vodafone (VOD.L) which has a dividend yield of 5.17 percent and BT Group (BT.L) which has a dividend yield of 3.52 percent.
(Reporting by Joanne Frearson; Editing by Hans-Juergen Peters)