(Adds quotes, updates prices)
By Veronica Brown
LONDON, March 19 (Reuters) - European stocks stumbled as a
sell-off in British bank shares wiped out early gains inspired
by the U.S. Fed's 3/4 point interest rate cut, with liquidity
concerns hanging heavy over markets.
Strong results from U.S. investment banking heavyweight
Morgan Stanley <MS.N> took the edge off the losses but shares
stayed in the red, while the dollar and sterling weakened on
renewed concerns about the global financial system.
The Morgan Stanley results also cut early gains in
safe-haven European government bonds, but they remained elevated
on talk of more stress in the banking sector as a global credit
squeeze that started in August last year continues.
The FTSEurofirst 300 index <> of top European shares
was down 1.12 percent at 1,228.14 points, having risen earlier
by as much as 1.1 percent after the Fed rate cut and results
from Goldman Sachs <GS.N> and Lehman Brothers <LEH.N> on Tuesday
that topped earnings forecasts ID:nN18227461]
British mortgage lender HBOS <HBOS.L> fell as much 17
percent before roughly halving its losses, while Societe
Generale <SOGN.PA> lost 7 percent after BNP Paribas <BNPP.PA>
said it would not bid for the French bank.
Royal Bank of Scotland <RBS.L> lost almost 3.5 percent.
Stock markets in Asia had picked up the baton from Wall
Street's searing rally after the U.S. Federal Reserve's 75 basis
point cut to 2.25 percent proved just the tonic they wanted.
The U.S. central bank also lowered the discount rate at
which it lends to other banks by 75 basis points in the latest
of a series of extraordinary steps aimed at preventing the
credit crisis from unravelling further.
But the post-Fed cheer fizzled out as worries about the
impact of the credit crunch grabbed attention.
"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."
LIQUIDITY WORRIES PERSIST
The Fed cuts rates by less than expected as markets had been
pricing in a 100 basis point move, bearing in mind deteriorating
global credit market conditions and worries for the U.S.
financial sector.
But U.S. stocks posted their biggest one-day gain in more
than five years on Tuesday, while Japan's Nikkei <> rose
2.5 percent.
U.S. futures were pointing however to a weaker Wall Street
open on Wednesday.
Alessandro Profumo, CEO of Europe's third biggest bank,
Italy's Unicredit <CRDI.MI>, said on Wednesday it was "almost
impossible to tell if we have got through the worst" of the U.S.
subprime lending crisis.
Whippy trade in the dollar finally gave way to losses as the
Fed rate cut was brushed aside on renewed banking concerns. The
dollar and sterling weakened broadly.
The euro was up 0.5 percent at $1.5699, still two cents
below Monday's record peak of $1.5904 <EUR=>.
The dollar was down 0.9 percent against the yen at 99.68 yen
<JPY=>, after trimming losses following the Morgan Stanley
results. It hit a 13-year trough of 95.71 yen on Monday.
The dollar was also down 0.6 percent against the safe haven
Swiss franc at 0.9960 francs <CHF=>.
"It's swinging one way and then the other," said Daragh
Maher, senior currency strategist at Calyon.
"The market mood locked into (the banking worries) and there
are amplified moves as things are so opaque."
(Additional reporting by Amanda Cooper and Simon Falush in
London, Alberto Sisto in Rome; Editing by Gerrard Raven)
