LONDON -- European equities hit their weakest levels in five months on Monday, ending down for the fifth session in a row amid creeping risk aversion and as worries about a credit crunch weighed on banks.
The pan-European FTSEurofirst 300 index lost nearly 0.2 percent to close at 1,517.7, falling 5.7 percent over five sessions. It is below a 6-1/2-year high of 1,635.6 hit about two weeks ago but still up 2 percent so far this year.
Banks were the leading drag on the FTSEurofirst, as the iTraxx Crossover index, the most widely used indicator of European credit confidence, briefly hit record levels.
Societe Generale lost 1.8 percent, and both Santander and BBVA shed 1 percent.
"What we have seen is people remembering that risk is a four-letter word," said Andrew Lynch, a European fund manager at Schroders.
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"Some of the leveraged buyouts that were being done or some of the IPOs coming to market had suggested that people's appetite for risk was high, and now we are starting to see that appetite for risk reduced again," he said.
Mergers and acquisitions have been a large driver of the gains in European markets. Worries about financing for deals escalated last week after debt offerings to finance buyouts of DaimlerChrysler's Chrysler Corp. and British pharmacy chain Alliance Boots were delayed.
"One must remember that the reason we had a really strong rise so far this year was because everything was being bid for," said one equities trader.
"Now private equity is finding it very difficult to get their hands on cash, and even when they get cash, they are being required to pay much more, so that indicates a huge credit crunch."
Europe's FTSEurofirst 300 index fell 5 percent last week, its worst weekly loss in five months.
On Monday, U.S. stocks were slightly lower towards the close of European trading hours.
SUBPRIME WORRIES
Shares in Commerzbank lost nearly 3 percent as the German bank said it expected the problems in the U.S. subprime mortgage market to cost it 80 million euros.
German industrial bank IKB tumbled 20 percent after it issued a profit warning linked to the subprime market.
Around European markets, Germany's DAX 30 share index and France's CAC 40 were flat, and Britain's FTSE 100 index shed 0.1 percent.
"It's probably a reasonably supportive environment for equity investors, but you had this situation where you had the Gerrman market up 20 percent plus in H1 at a time when the dollar was weakening and oil prices were rising, and something had to give eventually," said James Buckley, a European fund manager at Baring Asset Management.
Among gainers, chemical company ICI jumped 7.2 percent to 618.5 pence after rejecting an improved 650 pence a share proposal from Dutch rival Akzo Nobel and said the sweetened bid was not enough. Akzo fell 1 percent.
HSBC rose 1.4 percent after Europe's biggest bank reported higher-than-expected pretax earnings.
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