Fading U.S. rate hopes hit Europe

LONDON, England (CNN) -- European stocks fell sharply in midday trading on Monday as investors banked profits after markets made strong gains last week and hopes of an U.S. rate cut diminished.

"We don't think there should be a rate cut an extra quarter point is unlikely to do anything for the (U.S.) economy," Michael O'Sullivan, strategist at Commerzbank, told CNN. "There has been a great deal of wishful thinking in the equity markets."

The U.S. Federal Reserve meets on Tuesday to decide whether to cut interest rates in a bid to boost the world's biggest economy, which has been flagging according to the latest batch of economic data.

Wall Street was expected to open lower later on Monday.

London's FTSE 100 fell 97.8 points, or 2.3 percent, to 4,222.6 and Frankfurt's electronically traded Xetra Dax dropped 92.82 points, or 2.5 percent, to 3,668.29, while the CAC 40 blue chip index in Paris dipped 59.09 points, or 1.7 percent, to 3,388.7.

The pan-European FTSE Eurotop 300, a broader index of the region's largest stocks, was down 2 percent, with the information technology, media, telecom, insurance, and engineering sub-sectors leading declines.

Europe's key benchmark indices added more than 5 percent last week – their biggest weekly gain since September last year.

Vivendi Universal (PEX), the world's biggest media group, fell 4.7 percent to 16.20 euros after French newspaper La Tribune said the company may slash the value of its assets by several billion euros when it reports first-half earnings on Wednesday.

The company, which saw its stock rise about 15 percent last week, is expected to devalue its Internet assets by about 400-500 million euros, and USA Networks by 1.5 billion euros, the paper said, quoting one analyst. (Full story)

Insurance stocks, which are heavily invested in the stock market and rely on gains to pay claims, continued their declines.

Allianz (FALZ), Germany's biggest insurer, slid3.6 percent to 130 euros. The company also declined to comment on a report saying it had drawn up a short list of potential buyers for its investment banking business Dresdner Kleinworth Wasserstein.

Zurich Financial, Europe's third-largest insurer, fell 3.9 percent to 143 euros. The company said it lost $100 million on investments in bonds and shares of bankrupt telecom group WorldCom.

Deutsche Lufthansa (FLHA), Europe's second-largest airline, dropped 3 percent to 12.80 euros. The airline said on Friday its passenger traffic fell 6.5 percent in July.

The AEX index in Amsterdam fell 2 percent, as Philips Electronics, chip equipment maker ASML and oil giant Royal Dutch all dropped sharply. Milan's MIB30 index lost 0.8 percent and the SMI in Zurich declined 1.7 percent.

In the U.S. on Friday, stocks closed out a strong week little changed, with the Dow industrials seeing its first four-session winning streak since late January. The Dow gained 33.43 to close at 8,745.45 and the Nasdaq composite lost 10.40 to close at 1,306.12, while the Standard & Poor's 500 index gained 3.18 to end the day at 908.64.

Wall Street was expected to open lower later on Monday. S&P 500 index futures fell 6.3 points to 901.50 on the Globex trading system, while fair value, a measure that takes account of interest costs and dividend payments, was calculated at 910.49.