European markets falter as banks stay in spotlight

In choppy trading, the Paris stock market fell back into the red in late morning deals, losing more than 1.0 per cent at one stage, having earlier rallied by more than two per cent.

London shares gained 0.85 per cent in mid-day trading, while Frankfurt gained 0.95 per cent in value, but both indices trimmed their earlier gains.

In Madrid, stocks slipped into loss in early afternoon trading, to be down 0.64 per cent.

In foreign exchange deals, the dollar sank as low as 76.31 yen in early morning deals as investors flocked to the relative safety of the Japanese currency. That was not far from its post-World War II low of 76.25 yen.

The dollar later stood at 76.57 yen, down from 76.90 yen in New York on Wednesday. The euro meanwhile firmed to $1.4270 from $1.4178.

"Continued skittishness about the state of Europe's banks and their finances is keeping investors on the back foot this morning with financial stocks driving sentiment," CMC Markets analyst Michael Hewson told AFP.

Madrid meanwhile slid 0.11 per cent and Milan fell 0.88 per cent, as investors remained on edge over the eurozone debt crisis which threatens to snare both Spain and Italy.

Europe's main stock markets had earlier rallied in morning deals, after sliding the previous day on unfounded rumours of a France credit rating downgrade and worries over the Greek debt exposure of French bank Societe Generale.

"Panic was laid bare yesterday by the pace at which rumours ... spread through the market," said Rabobank analyst Jane Foley in London.

"The market has come to accept that French banks have a relatively high exposure to Italian and peripheral debt but yesterday's reaction appeared extreme."

In early afternoon trading, Societe Generale's share price sank 3.43 per cent to 21.42 euros, having earlier soared by almost nine per cent as the French banking giant denied it was facing trouble over its Greek exposure.

"More volatility this morning with a strong open not lasting long," said Atif Latif, director of trading at Guardian Stockbrokers.

"Banks were bid early on the open and have traded down on the back of yet more market chatter on funding issues for euro banks.

"This is sapping confidence in the market and some are believing that (earlier gains) may turn out to be a dead cat bounce."

At one stage on Wednesday, Societe Generale had seen its share price slump by more than 20 per cent.

"So much for the rally," said IG Index sales trader Will Hedden.

"Speculation surrounding Societe Generale has smashed banking stocks across Europe. Initially this was a result of rumours that France would be the next major power to lose AAA status.

"Confirmation from all three major rating agencies that this was not the case did not stop the sell-off. Now the rumour is that a French bank is selling its gold reserves to fight off the current crisis."

Gold prices pulled back to $1,791.18 per ounce, after hitting a fresh record high of $1,814.95 in Asian deals as investors sought the safe-haven precious metal.

Asian stock markets mostly fell on Thursday but closed off their early lows as some traders went bargain-hunting despite Wednesday's huge falls in Europe and on Wall Street.

New York's Dow Jones Industrial Average plummeted over four per cent Wednesday, more than wiping out a rebound on Tuesday as European debt troubles and worries of a new US recession kept investors nervous.

The French government has flatly denied that it might be the next major country to lose its cherished AAA status and the ratings agencies said they did not plan to downgrade.

"Lots of market chatter yesterday with respect to French banks and the French credit rating," said ING analyst Padhraic Garvey.

"Nothing of real substance here as of yet, and especially with the French AAA re-affirmed by all three rating agencies."

Financial markets have suffered dizzying losses in recent days and weeks amid mounting concern that the eurozone debt crisis and weak US economy could help push the world back into recession.

However, investors were reassured this week after the US Federal Reserve indicated that it would keep interest rates on hold near zero for at least two years.

At the same time, European Central Bank intervention appears to have calmed the debt market somewhat for the government bonds of Spain and other debt-laden peripheral eurozone nations.