Europe back in red as banks suffer

PARIS, France (Reuters) -- European stocks fell on Tuesday, retreating for the third time in four sessions, as persistent worries over the credit market and a downbeat forecast from UBS hit shares of financial institutions.

Adding to investors' concerns, a disappointing outlook from U.S. retail giant Wal-Mart Stores fueled worries that trouble in the U.S. housing market was hitting consumer spending.

The pan-European FTSEurofirst 300 index closed 1.23 percent lower, at 1,494.64, reversing some of Monday's rebound. Europe's benchmark index has lost nearly 9 percent over the past month. It is up 0.8 percent on the year.

"I think it's too early to call the end of this period of extreme volatility and encourage clients to be buying too aggressively at these levels," said Philippe Gijsels, senior equity strategist at Fortis Bank in Brussels.

"The problems in the subprime market may resurface, and other banks could come out with bad news, and it will be very easy to get the selloff started again," he said.

European shares dropped sharply at the end of last week, hit by worries over the fallout in the risky U.S. subprime market.

On Tuesday, trustees for two Canadian trusts said they were unable to issue new securities to repay maturing commercial paper and that a bank had declined to provide liquidity.

Banks suffered another steep fall, led by UBS, down 3.9 percent. Societe Generale tumbled 4.6 percent, BNP Paribas shed 3.5 percent and Credit Suisse fell 3.2 percent.

UBS warned that the market turmoil was likely to hit its investment banking business in the second half of the year, saying that if turbulent conditions prevailed throughout the third quarter, it would probably see "a very weak trading result in the investment bank."

The update was the first by a big bank since last week's turbulence in global markets prompted central banks to inject liquidity into the financial system.

"The markets still remain in a state of heightened alert over stock and credit market conditions, and these should remain exacerbated by continuing concerns about inflation," Bear Stearn analysts wrote in a note.

"Despite hopes that the Fed might switch its concerns to the uncertain state of financial market confidence, lingering inflation pressures are a reminder that the Fed is not going to take its eye off the prices ball."

Data released on Tuesday showed U.S. producer prices rose by a more-than-expected 0.6 percent in July. Economists polled by Reuters forecast producer prices -- a gauge of the prices paid at the farm and factory gate -- would rise 0.2 percent last month from an unrevised 0.2 percent fall in June.

Stripping out volatile food and energy costs, producer prices advanced 0.1 percent, less than the 0.2 percent increase forecast.

European Central Bank President Jean-Claude Trichet said ongoing volatility in financial markets represents a "normalization" of pricing risk to some extent and investors should keep their composure.

"We see increased volatility in many markets and a significant reappreciation of risks. In some respects, what has been observed can be interpreted as a normalization of the pricing of risk," he said, adding that the ECB was paying close attention to markets.

Around Europe, Germany's DAX index lost 0.7 percent, UK's FTSE 100 index shed 1.2 percent and France's CAC 40 dropped 1.6 percent. E-mail to a friend

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