Europe shares hit 3-wk low; growth concerns mount

European shares hit a three-week low on Thursday and charts pointed to further losses, with concerns about the global economic recovery and funding conditions in Europe forcing investors to the sidelines.

Although fewer banks took part in a European Central Bank funding operation than a tender on Wednesday - a positive sign for the health of banks - investors remained jittery after data showed the pace of Chinese manufacturing growth slowed in June and Moody's downgraded five Spanish regions.

At 1125 GMT, the FTSEurofirst 300 .FTEU3 index of top European shares was down 0.9 percent at 984.26 points after falling to a three-week low of 975.98. The Euro STOXX 50, the euro zone's blue chip index, was down 0.9 percent at 2,550.56 points.

"The markets are really concerned that the global economy, especially the economies in the west, will go into a second recession. On the top of that, there are a lot of uncertainties like the liquidity operations from the ECB" said Klaus Wiener, head of research at Generali Investments.

"Volatility is extremely high, sentiment is extremely low. The markets can correct a bit more, but I think people are overreacting. After a period of volatility, with budget deficits coming down, the market can get back to calmer waters again."

He said China was a big concern for the market but he did not expect it would turn down too strongly.

Figures showed the pace of Chinese manufacturing growth slowed in June as government steps to cool the property market and curb bank lending combined with a faltering global recovery to dampen sentiment.

While China's growth had been expected to cool from a double-digit pace in the first quarter, the latest reports combined with Europe's debt crisis and persistent weakness in the U.S. housing and labour markets have widened a negative view on the global recovery.

"Asian growth has been the engine of the world economy so it doesn't bode well if China is losing steam. The market had doubts about the global economy, and these numbers are confirming the doubts" said Jacques Henry, analyst at Louis Capital Markets, in Paris.

Banks were among the top losers, with the STOXX Europe 600 banking index falling 1.3 percent.

Standard Chartered, HSBC, Barclays, Credit Agricole and Natixis fell 2.3 to 3.1 percent.

Spanish stocks were also under pressure, but pared losses after the country sold 3.5 billion euros of a 5-year bond at the top end of the Treasury's target amount. Analysts said the issue fared well despite Moody's downgrading five Spanish regions.

Across Europe, the FTSE 100, Germany's DAX, France's CAC 40and Spain's IBEX fell 0.6 to 1.4 percent.

TECHNICAL PICTURE BEARISH

The technical picture remained poor with the S&P 500 on Wednesday breaking below the key 1,040 level that it had held since February.

"I am quite concerned at the way these major indices are breaking down through support areas and it bodes ill for the rest of the summer. I am nervous" said Bill McNamara, technical analyst at Charles Stanley.

He said it appeared that the Euro STOXX 50 index was likely to test its May low of 2,448. A breach of the level would open the next downside target of 2,400, its 50 percent Fibonacci retracement of a rally from March 2009 until January this year.

Mining shares, among the most sensitive to Chinese macro data, fell along with metal prices, with Xstrata, BHP Billiton and Rio Tinto down 0.6 to 2.6 percent.

Adding to negative sentiment, a purchasing manager's survey showed that France's manufacturing recovery eased for a second straight month in June and firms stepped up job cuts.