* FTSEurofirst 300 down 0.6 pct, earlier hit lowest in 3 yrs
* Investors cautious ahead of expected ECB rate hike
* Steel stocks drag on speculation steel nearing peak
By Rebekah Curtis
LONDON, July 3 (Reuters) - European stocks fell on Thursday,
having earlier hit their lowest in three years as investors
braced themselves for a likely rate hike from the European
Central Bank and after Wall Street slid.
At 0905 GMT the pan-European FTSEurofirst index <> was
down 0.6 percent at 1,160.12 points, falling for the ninth time
in twelve sessions. But the index, which shortly after the open
hit a low of 1,149.31, pared about half of its earlier losses as
some commodity and bank shares reversed initial falls.
Steel stocks dragged amid speculation that the price of
steel is nearing a peak, according to analysts. Shares in SSAB
<SSABa.ST> shed about 9 percent, ArcelorMittal <MTP.PA>
<ISPA.AS> lost 5.1 percent and ThyssenKrupp <TKAG.DE> fell 2.7
percent.
All eyes were on the ECB, which is expected to raise
borrowing costs for the first time in more than a year, at 1145
GMT, with investors betting on a rate rise of 25 basis points to
4.25 percent against a backdrop of increasing inflation
pressure. Some analysts expected a chunkier 50 basis point hike.
"The ECB appears firmly intent to hike rates today and
yesterday's warning by President Trichet of 'explosion' in
inflation has only reinforced a well-set market conviction that
rates are heading higher," Tullett Prebon said in a note.
In a mixed performance for banks, Anglo Irish Bank <ABGL.I>
lost 3.1 percent and UBS <UBSN.VX> shed 0.5 percent, but
Barclays <BARC.L> added 1.4 percent and Royal Bank of Scotland
rose 2.8 percent.
Around Europe, Britain's FTSE 100 <> partially
recovered from earlier losses to trade down 0.1 percent thanks
to recovering commodities, while Germany's DAX <> and
France's CAC-40 <> both lost 0.6 percent.
STAGFLATION
Fears of stagflation -- an environment of slow growth and
high inflation -- undermined the market as oil struck new highs
above $145 a barrel and investors, dogged by growth concerns,
awaited the release of the key U.S. monthly employment report.
"We'll be biting our nails until we get those figures out,"
Justin Urquhart Stewart, investment director at Seven Investment
Management, said of the payrolls data due at 1230 GMT.
Across the Atlantic the Dow Jones industrial average sank
into a bear market -- having closed more than 20 percent below
its October peak -- after a report on Thursday that showed U.S.
private employers cut the most jobs in nearly six years.
"This has been a summer of thunderstorms that have building
up for some time," Urquhart Stewart added. "Only now are people
beginning to realise quite how dark this particular storm is
looking, but it's been a long time coming."
Mortgage lender Hypo Real <HRXG.DE> was the DAX's biggest
decliner, down 4.6 percent after S&P cuts its long- and
short-term counterparty credit ratings by one notch following a
review of the group's profitability prospects.
Airline shares, already demoralised by high oil prices,
languished as Goldman Sachs took an axe to a basket of price
targets in the sector. Air France-KLM <AIRF.PA> dropped 4.6
percent, while Lufthansa and easyJet <EZJ.L> lost 1.5 and 1.8
percent, respectively.
Bucking the trend, British engineer and project manager AMEC
<AMEC.L> added 5.6 percent after it issued an upbeat trading
update and gave a confident outlook for 2008. An upgrade from
Seymour Pierce also helped the stock.
Traditionally defensive stocks also headed higher.
Pharmaceutical groups GlaxoSmithKline <GSK.L> and AstraZeneca
<AZN.L> rose 1.8 and 1.3 percent, respectively, while tobacco
company Imperial Tobacco <IMT.L> rose 0.8 percent.
(Editing by David Holmes)
