European shares extended losses on Tuesday as poor manufacturing surveys and concerns Spain may need a full bailout weighed, though a good run of earnings and hopes of more economic stimulus moves might prevent a lengthy sell-off, analysts said.
Investors traded cautiously after Moody's cut its rating outlook for Germany, the Netherlands and Luxembourg to negative late on Monday, citing increased chances that Greece could leave the euro zone, and as surveys showed the region's - and Germany's - private sector shrank in July.
At 1150 GMT, the FTSEurofirst 300 index of top European shares was 0.2 percent lower at 1,022.91 points. It had fallen 2.4 percent to a three-week low in the previous session on concerns Spain could soon become the latest euro zone member to request a full bailout.
The euro zone's blue chip Euro STOXX 50 index fell 0.6 percent to 2,167.31 points after dropping 2.6 percent in the previous session. Charts suggested the index could suffer further losses in the near term.
The picture was weakened by yesterday's violation of the upward sloping trend line from its June lows and the index falling below its 50-day moving average. It suggests we should expect some more downside to come, Roelof-Jan van den Akker, senior technical analyst at ING Commercial Banking, said.
The next horizontal support was at June's low of 2,125 points and if prices fell towards that level, then the index could fall into oversold territory on a short-term basis, suggesting a counter move that could help it gain, he added.
Sectors linked to growth fell on concerns that any full bailout for Spain on top of an already approved rescue for its banks might have severe consequences for the region and hurt economic activities. Insurers fell 1.3 percent, telecoms dipped 1 percent and euro zone banks fell 1.5 percent.
Spain is a major area of concern from a political perspective. It's relatively a big economy in context of Europe and clearly has financing needs which at current levels of market bond yields look problematic, Ian Richards, head of equity strategy at Exane BNP Paribas, said.
However, on periods of risk aversion when the market does have a little bit of a shocker, we need to be brave enough to recognise the underlying fundamentals in terms of valuations and earnings, which are very much attractive.
Analysts said market fundamentals were improving, with the second-quarter earnings season surprising on the positive side, China's manufacturing purchasing managers index rising to a five-month high in July and valuations remaining cheap.
Valuations have given us a great opportunity, said Richard Plackett, manager of the BlackRock UK Special Situations Fund.
If you are going to realise that opportunity, you are going to have to be very careful. We need to invest accepting that most companies won't grow, and we need to find the small number of companies that can grow.
According to Thomson Reuters Datastream, shares on the STOXX Europe 600 index traded at 10 times their one-year forward earnings, against a 10-year average of 12.4. The U.S. S&P index also traded at 12.4 times its forward earnings.
The FTSEurofirst 300 index recorded seven straight weeks of gains after falling this week, and is still up about 8 percent from a low in June. Analysts said the market could get some support on expectations that the U.S. central bank might launch some more stimulus measures to support the economy.
On the positive side, technology shares were the top gainers, with Software rising 10 percent after saying it continued to expect an EBIT margin of 23-24.5 percent for 2012 after posting total revenue growth of 32 percent in licensing sales in the second quarter.