* Top-300 index falls 2.6 pct; lowest close since June 2005
* Banks slide on fears linked to U.S. home financing groups
* Energy only sector to gain as oil price hits $147
By Peter Starck
FRANKFURT, July 11 (Reuters) - European shares fell sharply
on Friday to end at their lowest level in more than three years
as banks tumbled on fears linked to U.S. home financing groups
Fannie Mae <FNM.N> and Freddie Mac <FRE.N>.
Energy <.SXEP> was the only sector in Europe to finish in
positive territory, led by heavyweights oil groups Total
<TOTF.PA> and Royal Dutch Shell <RDSa.L> on a spike in the price
of crude <CLc1> to over $147 a barrel amid growing worries of
threats to supplies from Iran and elsewhere.
The FTSEurofirst 300 index <> of top European shares
dropped 2.6 percent to 1,126.39 points -- its lowest close since
June 9, 2005 and down more than 25 percent so far this year.
"The market has been beaten to its knees and the downturn
will probably continue," said Christian Schmidt, analyst at
German bank Helaba.
At one stage on Friday Europe's benchmark stock index rose
as much as 0.8 percent, led by energy stocks and banks. The
latter rallied initially on reports of a potential U.S.
government bailout of Fannie Mae and Freddie Mac.
Sentiment quickly turned sour, however, and the DJ Stoxx
European bank index <.SX7P> ended more than 4 percent lower.
"The fact that the matter (a bailout of Fannie Mae and
Freddie Mac) is being debated could also indicate that a new
wave of the financial crisis -- the fourth -- is on its way,"
Commerzbank said in a research note.
"Given their size, if these agencies get into difficulties,
there are serious implications for the whole financial market,"
Commerzbank said, noting that the two account for some 42
percent of all outstanding U.S. mortgages.
U.S. Treasury Secretary Henry Paulson said the primary focus
was supporting Fannie Mae and Freddie Mac "in their current
form", remarks which analysts took as a hint that the U.S.
government may not swiftly step in to help.
The U.S. S&P 500 financials index <.GSPF> was down more than
4 percent as Europe's stock markets closed. Shares in both
Fannie Mae and Freddie Mac fell by around 25 percent.
"The catalyst to the recovery is surely the banking system.
When the banks are in a position to finally quantify their
losses and confirm their balance sheets have been shored up with
fresh capital, then and only then will the recovery commence,"
said David Buik, strategist at BGC Partners in London.
"That could be at least a year away," he added.
HARD TO MAKE MONEY
Martin Wirth, fund manager at German equities-focused
Frankfurt Performance Management, was also pessimistic.
"With the mediocre newsflow, the high stresses in the
financial system and the downward swing in momentum, a quick
return to a bull market is less than likely," he said.
"It will be very difficult to make money in the coming
weeks," Wirth added.
Financial sector losses in Europe were led by Credit
Agricole <CAGR.PA>, down close to 10 percent, after newspaper Le
Monde reported that the French bank's chief executive and
chairman could resign over losses tied to the credit crunch.
Royal Bank of Scotland (RBS) <RBS.L> fell 8.6 percent after
Zurich Financial <ZURN.VX> pulled out of the bidding for RBS's
insurance unit. The Swiss company's stock rose 4.2 percent.
Other financials losing ground included France's Societe
Generale <SOGN.PA>, down 7 percent, Britain's Barclays <BARC.L>
and Lloyds TSB <LLOY.L>, both down almost 6 percent, as well as
France's AXA <AXAF.PA> and Switzerland's UBS <UBSN.VX>, which
shed more than 5 percent each.
"With the sharp fall in equity markets in recent weeks, lower
interest rate volatility and the impact of rising short rates on
yield curve trades, we expect the outlook for trading revenues
to remain challenging," Credit Suisse said in a research note on
European wholesale banks.
Vodafone <VOD.L> was another notable loser, down 4.7
percent, after tax experts and a source familiar with the
situation said the mobile phone group's potential tax bill in
India could double to $4 billion if it loses a court case.
The rise in crude underpinned oil and gas companies, with
Total up 0.7 percent and Royal Dutch Shell 0.2 percent firmer.
But CMC Markets warned in a note: "Any cheer here will be
shortlived if Israel graduate from the sabre rattling that we're
seeing right now to physical action against Iran, as any
disruption in oil supply would presumably see investors running
for cover across the board, regardless of how high speculators
see fit to push the price of crude."
An Israeli military spokesman said media reports about
Israeli warplanes secretly training in U.S.-controlled Iraq for
possible attacks on neighbouring Iran were "utterly baseless."
(Additional reporting by Rebekah Curtis and Patrizia Kokot in
London; Editing by Erica Billingham)
