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European shares sink to 26-month low

Debt crisis seen spreading to real economy

PARIS — European stocks sank on Thursday, hitting a 26-month low as the Federal Reserve’s bleak outlook for the U.S. economy and data showing the Chinese and German economies losing steam sent investors rushing out of risky assets.

Shares that had shown some resilience in the market falls of the past two months, such as luxury goods maker LVMH and industrial names like EADS , featured among the biggest losers on Thursday, with no sector spared.

“Indexes are getting close to a breaking point, with the spotlight on the weakening U.S. economy adding to the negative newsflow from Europe, and things aren’t about to change,” Saxo Banque market analyst Alexandre Baradez said.

“There is more downward potential ... When we break such support levels, there is a risk of a sudden 10-15 percent drop, so people remain on the sidelines for now.”

At 1155 GMT, the FTSEurofirst 300 index of top European shares was down 4.1 percent at 880.55 points, after falling to a 26-month low of 877.13 points.

LVMH was down 6.5 percent, Rio Tinto down 8.4 percent and BHP Billiton down 6.4 percent.

Airbus parent EADS lost 7.6 percent, hurt by mounting fears for the supply of financing for new aircraft purchases due to the European debt crissis and worries surrounding French banks — which play a key role in the aircraft financing market.

“It’s the first big example of the renewed credit crunch spreading from the financial sphere to the real economy,” David Thebault, head of quantitative sales trading, at Global Equities, said.

French banks were under renewed pressure, with Credit Agricole down 6.4 percent and Societe Generale down 6.8 percent.

BNP Paribas dropped 4.3 percent despite reiterating that the bank expects to hit tougher capital targets under Basel III industry rules without raising fresh funds, while speculation swirled about a possible investment from the Gulf state of Qatar, denied by the bank.

“If Qatar would have been the way out of the slump, the stock should have reacted positively. The fact is that if the Italian situation gets worse, a couple of billion euros won’t help ... what we need is a solution to the European debt crisis,” a banking analyst said.

The spike in risk aversion also made waves in other asset classes. The Euro STOXX 50 volatility index , Europe’s main fear gauge, rose 9 percent, German Bund futures FGBLc1 > hit record highs and the euro fell to eight-month lows to the dollar.

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