* FTSEurofirst 300 falls 3.6 percent
* Financial stocks hit by Lehman bankruptcy filing
* Chemicals maker Ciba leaps on BASF takeover
By Peter Starck
FRANKFURT, Sept 15 (Reuters) - European shares fell sharply
on Monday, led by financials such as UK mortgage bank HBOS
<HBOS.L>, after U.S. investment bank Lehman Brothers <LEH.N>
filed for bankruptcy protection.
The FTSEurofirst 300 <> index of top European shares
fell 3.6 percent to 1,119.94 points, its lowest close since July
16. Declining stocks led advancers by more than six to one.
"We will have still ahead a few days, maybe one or two
weeks, of nervousness," said Heinz-Gerd Sonnenschein, equity
strategist at Postbank in Germany.
"The nervousness will remain but I don't expect sharp moves
like today every day in the week," he said, adding that markets
could calm down if quarterly results due this week from other
big U.S. banks showed that they are in better shape than Lehman.
Goldman Sachs <GS.N> reports on Tuesday and Morgan Stanley
<MS.N> on Wednesday.
LandesBank Berlin (LBB) said the latest events showed that
an end to the financial crisis was definitely not in sight.
"Especially in the United States, it is impossible to say
whether other big financial institutes will fall into the
abyss," LBB said in a note.
American International Group <AIG.N> looked to be at risk of
becoming the latest victim of the shake-up as the insurer's
shares plunged as much as 71 percent on fears of credit losses.
Federal funds traded in the U.S. interbank market were
indicated to have jumped to 4 percent on Monday, double the
Federal Reserve's target rate -- a sign some financial players
were hesitant about lending to some other counterparties.
"Lehman's collapse also increases concerns that other banks
could fail," Global Insight said in a note.
"As a result, banks are likely to become even more reluctant
to lend to each other, thereby increasing the risk that the
credit crunch will deepen and last for some considerable time,"
Global Insight said.
HBOS shares fell almost 18 percent, with Fox-Pitt, Kelton
analyst Leigh Goodwin citing the bank's sensitivity to the
functioning of the interbank market.
"If the interbank market gets more dysfunctional, the
likelihood of the mortgage-backed security market ever getting
going again is put back," Goodwin said.
Commerzbank said: "Counterparty risk is very much going to
be the market theme for the coming weeks."
FED IN FOCUS
"This week's FOMC meeting has suddenly taken on a new
importance," Commerzbank said, pointing to the U.S. Federal
Reserve's monetary policy meeting on Tuesday. The Fed's rate
decision is due at 1815 GMT, after the European markets' close.
"Given the events of the weekend, the FOMC meeting will be
most interesting to follow. The case for an 'on hold' decision
is still valid," Goldman Sachs said in a note.
Market consensus is for the Fed to leave rates unchanged.
"If financial markets become disorderly, with severe price
action and a seizing up of market liquidity, central banks may
want to counter the implied tightening of financial conditions
and cut rates in order to stabilise confidence and prevent a
negative feedback loop between falling asset prices and the real
economy," Morgan Stanley said in a note.
On Monday, UBS <UBSN.VX> shares dropped almost 15 percent
after media reports that the Swiss bank will have to write down
another $5 billion in the second half. UBS said it had enough
capital to face this and future market crises.
Deutsche Bank <DBKGn.DE>, which said last week it will need
to raise capital to finance its acquisition of a stake in
Deutsche Postbank <DBPGn.DE>, fell 6.4 percent.
ING cut its target price for the stock to 53.60 euros from
55.50 euros, saying the need for fresh capital would keep
Deutsche Bank's risk premium high.
Britain's FTSE <> fell 3.9 percent, Germany's DAX
<> lost 2.7 percent and the French CAC 40 <> dropped
3.8 percent.
Index heavyweight energy stocks such as Total <TOTF.PA>,
down 5 percent, and Royal Dutch Shell <RDSa.L>, down 4.4
percent, were hit by a steep fall in crude oil prices <CLc1>
<LCOc1>, which analysts linked partly to U.S. financial industry
woes.
"The price of crude oil could continue to fall because the
financial crisis in the U.S. has fuelled fears of an economic
slowdown across the globe, which would be negative for crude oil
as an economic good," Commerzbank said in a note.
Economic growth concerns also pulled base metals prices
lower, hurting shares in miners such as Rio Tinto <RIO.L>, down
6.6 percent, and BHP Billiton <BLT.L>, which fell 4.5 percent.
Swimming against the tide, Swiss chemicals maker Ciba
<CIBN.VX> soared 28 percent on news of an agreed $3 billion cash
offer from German rival BASF <BASF.DE>, which fell 4.2 percent.
"The acquisition is not particularly cheap," Dresdner
Kleinwort said in a note. "BASF must expect meaningful synergies
from the deal. Unfortunately, the management refused to discuss
these in the conference call. While understandable from legal
point of view, this will hurt sentiment," Dresdner said.
(Additional reporting by Sarah Marsh in Frankfurt and Joanne
Frearson and Brian Gorman in London; Editing by Paul Bolding)
