Fall in banks snuffs out rally in European shares

                                
 By Amanda Cooper
                                
 LONDON, March 19 (Reuters) - European shares fell on
Wednesday after most bank stocks surrendered early gains and a
sell-off in the technology sector gathered steam following a
results warning from Ericsson's <ERICb.ST> joint venture with
Sony.
                                
 Banks were the top performing sector in early trade, led by
a rally in BNP Paribas <BNPP.PA>, which rallied 4.7 percent
after saying it would not bid for rival Societe Generale
<SOGN.PA>.
                                
 But these gains quickly evaporated as speculation bubbled in
the market over possible liquidity issues facing British banks,
and the broader European market fell.
                                
 British mortgage lender HBOS <HBOS.L> fell as much as 17
percent, while Royal Bank of Scotland <RBS.L> lost 2.1 percent.
Among continental European banks, SocGen <SOGN.PA> lost 5.7
percent, while Swiss banks UBS <UBSN.VX> and Credit Suisse
<CSGN.VX> rose between 1.2 and 3.5 percent.
                                
 By 0934 GMT, the FTSEurofirst 300 index <.FTEU3> of top
European shares was down 0.8 percent at 1,232.50 points, having
risen earlier by as much as 1.1 percent after the Federal
Reserve cut U.S. rates on Tuesday and two major Wall Street
banks beat expectations with their earnings.
                                
 "Obviously the banking sector is giving the most back," said
Dresdner Kleinwort strategist Philip Isherwood.
                                
 "The Fed last year was talking about how the labour market
was strong, the consumer would be fine, there was a bit of
confined problems in subprime, the housing market was going to
turn around. That message they're giving (now) is very
different," he said. 
                                
 "They're clearly in resuscitation mode ... the reason
they're going to carry on cutting rates is the weakness is going
to be more enduring than people think."
                                
 
                                
 BANKING ON MORE WEAKNESS
                                
 The FTSEurofirst has fallen by 18 percent this year, led by
declines in the banking sector as investors have grown
increasingly worried about the lasting impact of the credit
crunch on corporate balance sheets and the global economy.
                                
 Wednesday's cut in U.S. rates brings the Fed's tally up to
three full percentage points of declines in its benchmark fed
funds target rate to 2.25 percent since September, as it has
raced to shield the economy against fallout from the global
liquidity squeeze.
                                
 "Keep in mind that the effectiveness of rate cuts by the Fed
currently is reduced because the monetary transmission mechanism
is not functioning as normal," said Arthur van Slooten, a
strategist at Societe Generale in Paris.
                                
 "So it's not a rate cut in itself, that is not the main
thing that will get us out of this liquidity crisis, but
obviously yesterday's news is good."
                                
 Wall Street heavyweight Morgan Stanley <MS.N> is set to
report first quarter earnings later in the day. U.S. benchmark
indexes rallied by more than 3 percent on Tuesday after Goldman
Sachs <GS.N> and Lehman Brothers <LEH.N> reported declines in
earnings but beat expectations.
                                
 Also helping to support equities was a narrowing in European
credit spreads. The investment-grade Markit iTraxx Europe
<ITRAC5EA=GFI> fell to 124.5 basis points, according to data
from Markit. The index has shed over 40 basis points since
hitting a record high of 166 basis points two days ago.
                                
 Technology stocks were an additional drag on the broader
Europe equity market with Ericsson <ERICb.ST> losing more than 5
percent after its joint venture, Sony Ericsson, said slower
growth meant first-quarter earnings could fall by more than
half.
                                
 Finnish mobile phone maker Nokia <NOK1V.HE> fell 3.7
percent.
                                
 The DJStoxx index of European technology stocks <.SX8P> lost
3.3 percent, making it the worst performing sectoral index.
                                
 Airline stocks also fell after budget carrier EasyJet
<EZJ.L> said record fuel costs would erode its full-year profit
if they did not fall soon. Shares in low-cost rival Ryanair
<RYA.I> fell by nearly 9 percent, while British Airways <BAY.L>
lost 4.2 percent and Air France-KLM <AIRF.PA> dropped 1.9
percent.
                                
 Across the European sectors, auto stocks were the sole
gainers. The DJStoxx index of European carmakers rose 0.5
percent, as the likes of Daimler <DAIGn.DE>, BMW <BMWG.DE> and
Renault <RENA.PA> rose between 1.7 and 2.5 percent. The euro
<EUR=> rose against the dollar -- normally a negative for
exporters -- but stayed below its recent record highs.
 (Reporting by Amanda Cooper; editing by Rory Channing)