Surprise data from US sends shock waves rippling across the Atlantic

European stocks posted their biggest weekly decline this year as a report showed the United States economy unexpectedly shrank in the fourth quarter and Spain's markets regulator lifted a ban on shorting equities.

Spanish banks led a gauge of European lenders lower, with Banco Santander and Bankia each dropping more than 7 per cent. Saipem plunged 36 per cent, the most since at least 1989, after lowering its earnings forecasts for this year and next. Imagination Technologies Group rallied 18 per cent, the best performance on the Stoxx Europe 600 Index, after Morgan Stanley recommended buying the company's shares.

The benchmark Stoxx 600 fell 0.5 per cent to 288.2 this past week, its biggest drop since the end of last year. The gauge has still advanced 3.1 per cent so far this year after US policymakers agreed to a compromise federal budget that prevented spending cuts and tax increases from coming into force. The changes had threatened to push the world's biggest economy into a recession.

"The US GDP report was a negative surprise that weighed on markets, but investors did calm down after the initial shock," said Joerg Lorenz, a senior fund manager at Zuercher Kantonalbank in Zurich. "Most markets need a break to digest the gains. Looking forward, economic data indicate the bottom is behind us. This will contribute to a stabilisation on the markets in the mid-term."

The US economy contracted for the first time since the second quarter of 2009. GDP dropped at a 0.1 per cent annual rate, a US commerce department release showed on Wednesday. That compared with the median estimate of 83 economists surveyed by Bloomberg that called for a 1.1 per cent expansion. A report from the US labour department showed the unemployment rate increased to 7.9 per cent from 7.8 per cent.

A separate release showed that US house prices increased 5.5 per cent in the year through November, their biggest year-on-year gain since August 2006.

Spanish banks slumped, with Banco de Sabadell plunging 14 per cent and Bankia tumbling 25 per cent, as the country's stock market regulator, known as CNMV, said on Thursday it would not extend a ban on shorting stocks.

Short sellers sell borrowed shares with the intention of buying them back later at a lower price, a practice some politicians and investors blame for increasing market turbulence. Spain's Ibex 35 Index had soared 40 per cent from its low last year through to Thursday.

Santander lost 7.7 per cent after the country's largest lender set aside money for further loan losses in its home market. The bank reported fourth-quarter profit of €401 million (Dh2.01 billion), missing the average analyst estimate of €801.6m.

National benchmark indexes retreated in 12 of western Europe's 18 markets last week. France's CAC 40 dropped 0.1 per cent, while the United Kingdom's FTSE 100 Index added 1 per cent. Germany's Dax slipped 0.3 per cent and Spain's Ibex 35 slumped 5.7 per cent, its biggest slide since September.

Saipem plunged 36 per cent. Europe's largest oil services company by sales lowered its forecast for earnings before interest and taxes for last year to about €1.5bn. Earnings before interest and taxes will fall to about €750m this year, the company said. It predicted earnings from onshore projects would slump by about 80 per cent this year.

Other companies that provide engineering services to oil companies slid on concern that the announcement signalled profit would fall across the industry. Technip slipped 4.5 per cent and Subsea 7 declined 4.4 per cent.

In Italy, Banca Monte dei Paschi dropped 11 per cent. The lender, facing a criminal probe into money-losing structured deals, had its credit rating cut by Standard & Poor's on concern the investigation may lead to bigger losses. The bank had its long-term grade lowered to BB from BB plus. S&P reiterated its negative outlook on the company.

Antofagasta, a copper producer controlled by Chile's Luksic family, fell 7.8 per cent after forecasting increased costs this year. The expense of mining a pound of copper will increase 14 per cent to 185 cents this year, the company said.

* Bloomberg News