Europe stocks splashed in red ink

LONDON, England (CNN) -- European stock markets could not extend the previous sessions gains as investors looked beyond the latest's company earnings from KPN and WPP for signs of strong economic recovery.

"The market is pausing for breath," Khuram Chaudhary, European equity strategist at Merrill Lynch, told CNN. "Investors are looking for clear signs of strong economic growth."

London's FTSE 100 slipped 0.6 percent to 4,398.0 and Frankfurt's electronically traded Xetra Dax dropped 1 percent to 3,796.56, while the CAC 40 blue chip index in Paris lost 0.9 percent to 3,460.25.

The pan-European FTSE Eurotop 300, a broader index of the region's largest stocks, was down 0.9 percent, with the pharmaceuticals, auto, chemicals, aerospace and beverages sub-sectors leading declines.

The Eurotop 300 has rallied 15 percent in the past month after hitting a five-year low on July 24.

But a series of stock broker downgrades took a big chuck out of markets.

Anglo-Swedish drug group AstraZeneca (AZN) fell 5.5 percent to 1,970 pence, down for the second straight session as investment banks cut their recommendations on the stock after Monday's announcement of a setback for its cancer treatment Iressa.

Swiss drug maker Roche dipped 2.2 percent to 112.25 Swiss francs after Morgan Stanley trimmed its estimates for Roche's drug Tarceva, which is similar to AstraZeneca's Iressa, on fears of regulatory setbacks.

Nestle, the world's biggest food company, dropped 4.1 percent to 331.00 Swiss francs after investment bank Merrill Lynch cut its rating on the stock to "neutral'' from "buy,'' citing concerns about acquisitions and cost cutting programmes dampening short-term returns.

The downgrade came ahead of Nestle's results due on Wednesday.

ABN AMRO, the Netherland's biggest bank, lost 3.4 percent to 17.36 euros after UBS Warburg cut its rating on the stock to "hold'' from "buy'' and trimmed its share price target.

WPP (WPP), the world's biggest advertising group, lost 5.8 percent to 470.95 pence. The company said it did not expect a recovery until next year at the least, as it posted a 30 percent drop in profit. (Full story)

There were some stocks having a stellar session. Vivendi Universal (PEX), Europe's biggest media company, soared 17.1 percent to 23.20 euros after the Wall Street Journal said Liberty Media (L), controlled by media mogul John Malone, was looking at merging its cable assets with Vivendi's U.S. entertainment business. (Full story)

Deutsche Telekom (FDTE), Europe's biggest phone company, rose 2 percent to 11.76 euros. The Wall Street Journal reported that Deutsche Telekom's U.S. wireless group VoiceStream has proposed a merger with domestic rival Cingular Wireless in a bid to compete better with market leader Verizon Wireless. (Full story)

KPN, the Netherlands biggest phone company, climbed 6.5 percent to 5.04 euros after the company said earning would rise 14 percent this year, despite posting a 12.3 billion euros ($12.1 billion) second-quarter loss. (Full story)

The AEX index in Amsterdam fell 1 percent and Milan's MIB30 index lost 0.8 percent, while the SMI in Zurich declined 1.4 percent.

In the U.S. on Monday, stocks rallied sharply as investors took a cue from a pair of positive quarterly reports out of the retail sector and broad-based strength in software, networking and chips. (Full story)

The Dow Jones industrial average gained 212.73, or 2.42 percent, to 8,990.79 and the Nasdaq composite rose 33.53, or 2.46 percent, to close at 1,394.54, while the Standard & Poor's 500 index added 21.93, or 2.36 percent, to end the day at 950.70.

Wall Street was expected to open lower later on Tuesday. S&P 500 index futures fell 5.8 points to 943.2 on the Globex trading system, while fair value, a measure that takes account of interest costs and dividend payments, was calculated at 952.34.