Eurostocks hit five-week low

LONDON, England (Reuters) - European shares sank to five-week lows on Monday after a profit warning from International Business Machines piled on the pain for investors already coping with big crude price rises amid rising Mideast tensions.

IBM warned of lower-than-expected first quarter revenues because of deferred customer spending.

The announcement surprised investors with its timing and scale, and dealt a blow to hopes that the technology sector had seen the worst.

The news sent an already weak European tech sector down sharply to late-February levels, with Dutch Philips Electronics shedding 5.4 percent as part of a broad-based stock market retreat.

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"It's bad news. For IBM's sake it's quite a big statement, 10 days in front of release of figures. That is a pretty short time, and they should have come out with a warning sooner," said Krijn Moens, a fund manager at Eureffect in Amsterdam.

"Hardware still seems to be difficult, which is why Philips is going down a lot," Moens added.

At 1530 GMT with only Frankfurt still officially trading, the pan-European Eurotop 300 index was off 1.3 percent, and heading for its weakest close since March 1. Declining issues trounced advancers by five to one.

Some defensive and safe-haven shares like food companies, supermarkets and tobacco stocks gained.

But the DJ Stoxx European technology index sank 3.6 percent to its lowest level since late February. Top name telecom equipment makers like Nokia Ericsson and Alcatel, were down between three and five percent.

IBM shares slumped in New York, and analysts said Europe's technology sector still looked richly priced.

"Valuations still remain high in the European technology sector. I see about 10-15 percent further downside in the sector before prices begin to get interesting again," said Martin Brooker, a pan-European equity strategist Credit Lyonnais Securities.

IBM's was the latest in a steady stream of pre-announcements before the first-quarter earnings season, due to start properly by next week.

"Traditionally there has always been a big sell-off going into the U.S. reporting season. However U.S. earnings will not be that bad, especially because there is such an easy year-on-year comparison.

"I think there will be earnings upgrades which will bolster the market against any further escalation in the Middle East," Brooker said.

On Wall Street, the Dow Jones industrial average, which includes IBM as a component, had fallen 0.8 percent to 10,184 points, with IBM's 11-percent slide accounting for a big chunk of the loss.

European bourses were already mired in morning trade as Prime Minister Ariel Sharon rejected U.S. demands that Israel end its fierce offensive in the West Bank.

"The crisis in the Middle East has caused a heightened risk aversion amongst investors. They are worried the fighting will weigh on government budgets, travel, leisure as well as profit growth," said Jason James, a European strategist at HSBC bank.

Iraq President Saddam Hussein turned up the heat by announcing a suspension of oil exports for a month in protest at Israel's incursions into Palestinian areas, a move that sent May crude oil prices in London soaring four percent to $27 a barrel.

Iraqi oil represents just four percent of international oil supplies.

Investors worry that higher crude oil prices will raise fuel costs for companies and jeopardise economic and profit recovery.

The crude gains helped some oil stocks, with Shell advancing by 0.3 percent.

However, airline stocks were badly affected as higher crude prices usually translate into more expensive jet fuel. Shares in Air France sank five percent, while British Airways shed 2.4 percent, and Gerrmany's Lufthansa fell three percent.

Spanish Internet firm Terraycos shed 5.5 percent despite declarations by the firm's chairman that he was unaware that German media group Bertelsmann wanted to renegotiate the remainder of a five-year $1 billion advertising contract.

Scandal-hit big bank Banco Bilbao Vizcaya Argentaria sank five percent as reports over hidden capital gains totalling 225 million euros held in secret offshore accounts raised concerns over a widening investigation and possible regulatory sanctions.

HVB Group and other leading German banks stocks slid as the widely flagged insolvency of the core rights and television unit of media firm Kirch raise fresh profit concerns after a raft of high-profile German bankruptcies.

Ben Verwaayen, the new head of Britain's BT Group telecom company unveiled a three-year plan to cut costs, debt and curb spending, but the programme failed to impress investors who sent the stock down two percent.

Shares in mining giant Anglo American sank three percent after it raised $1.1 billion through convertible bonds in a move that prompted some investors to sell the stock and buy the new debt instead.

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