Europe sheds early gains

LONDON, England (Reuters) -- European shares shed their early gains and fell in late trade on Monday, dragged down by Wall Street, as short-selling resumed in Ericsson, with just days to go before trade ends in the Swedish group's rights issue.

News the European Commission is set to allow mobile phone operators T-Mobile and mm02 to pool base stations, antennae and network parts to save up to $5 billion between them in Germany and Britain, was an additional burden for Europe's equipment makers.

But any moves were magnified by the light trading conditions, with the region's biggest market -- London -- closed for a public holiday.

And with key U.S. durable goods and consumer confidence data scheduled for release on Tuesday some investors kept their powder dry, wary of the potential for more negative news from the world's biggest economy, even though strategists drew comfort from the market's recent rally from five-year lows.

"We're at the point where financial markets could impact economic growth, in which case the bounce we've seen since July 24 could have a positive impact," said Gert de Mesure, head of equity strategy at Delta Lloyd Securities in Antwerp.

De Mesure saw a bit more upside for European shares followed by a period of range-trading, arguing that expectations of fresh U.S. interest rate cuts in the event of weaker economic data had effectively put a floor under the market.

At 1546 GMT, with only Frankfurt officially trading, the FTSE Eurotop 300 index of pan-European blue chips was down 0.9 percent at 983 points, having risen in morning trade.

The narrower DJ Euro Stoxx 50 index was down 1.9 percent at 2,766 points.

Falling stocks outnumbered the risers by four-to-one, and the DJ Stoxx tech index topped the sectoral loser board.

The FTSE Eurotop 300 rose about 2.3 percent last week and is trading some 15 percent above the five-year lows hit on July 24.

In New York, the Dow Jones industrial average reversed initial gains and slipped one percent, as did the tech-laden Nasdaq Composite.

Shares in Ericsson continued to trade in volatile fashion amid the Swedish telecoms equipment maker's heavily-discounted rights issue, which stops trading on Thursday in Stockholm, as foreign investors snapped up the rights but sold the stock short, brokers said.

The stock slumped by 8.2 percent having jumped by 42 percent in previous week, after bouncing off 10-year lows last Monday.

That recovery had been prompted by talk that the ability of hedge funds to sell-short had been severely curtailed by a dearth of available paper, although some shareholders subsequently said they were open for stock-lending business.

Ericsson had started the day firmer on news it had won a 55-million-euro, three-year order from Turkey's Aycell operator to expand its mobile GSM network.

French rival Alcatel fell 5.6 percent after Mitsubishi Materials Corp canceled its copper coil alliance with the French telecommunication equipment giant, according to Japanese business daily Nihon Keizai Shimbun.

Zurich zooms

Meanwhile, cash-strapped Zurich Financial led the large-cap climbers, adding 1.2 percent after shares in the Swiss insurer jumped more than 25 percent last week.

Zurich said after the close on Friday that California-based asset manager Brandes Investment Partners, already the group's biggest shareholder, had raised its stake to just over 10 percent, after earlier talk that Zurich was a bid target, possibly of U.S. insurance giant AIG.

That was followed on Monday by further talk that the firm might seek to raise capital ahead of its results next week, with the rumours this time calling for the sale of its profitable U.S. Farmers business.

The only company of note reporting on Monday, Europe's largest department store and mail order group KarstadtQuelle, fell 1.2 percent after reporting a bigger-than-expected second-quarter loss on the back of weakening consumer demand in Germany.

Nestle slipped 1.7 percent after the newspaper USA Today reported it had finally made an offer, worth about $11.5 billion, to acquire U.S. rival Hershey Foods.

The Swiss food giant refused to comment but some investors feared Nestle might be overpaying for the American chocolate icon and might have difficulty digesting the company after a series of several big deals.

However, the Nordic region's biggest bank Nordea was 2.3 percent firmer after investors cheered the appointment of Lars Nordstrom as its new chief executive officer to succeed Thorleif Krarup.