European shares fell sharply Monday, as a warning on France by credit rating agency Moody's added to investors' worries about the euro zone debt crisis, and a political deadlock threatened to prevent the United States cutting its public spending deficit.
Moody's Investors Service expressed worries that a recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for the country's credit rating.
Meanwhile a congressional super committee was expected to concede defeat in its bid to lower the U.S. deficit.
There's a chronic lack of political leadership either side of the Atlantic. They're showing they're not up to the task, said Bill Dinning, head of investment strategy at Kames Capital in Edinburgh, which has 48.8 billion pounds under management.
The FTSEurofirst 300 index of top European shares fell 3.3 percent to 919.74 points, the lowest close since October 5. Volumes were low, at 78 percent of the 90-day average.
Cyclical stocks were among the biggest casualties on worries the euro zone crisis would lead to recession, thereby reducing demand for natural resources such as metals. The STOXX Europe 600 Basic Resources index fell 6.1 percent, pushing its loss for 2011 to more than 36 percent.
Euro zone bond yields, a major focus for the market in November, were off the euro-era records of last week, but still high. Investors remain sceptical that new national governments within the bloc, which are set to enact sweeping austerity measures, will be able to resolve the crisis, as growth prospects remain bleak.
Yields on Spanish bonds continued rising on Monday towards 7 percent, the mark that led to bailouts in Greece, Ireland and Portugal, as Sunday's election victory for conservatives promising deeper austerity measures failed to calm markets. Spain's main share market index, the IBEX, fell 3.5 percent.
Italian 10-year bond yields steadied at around 6.7 percent but Mario Monti's new technocrat government still faces the possibility of an election before 2013.
Italy's FTSE MIB index fell 4.7 percent, and has lost 28 percent this year, compared with an 18 percent loss for the pan-European index.
French banks, exposed to sovereign debt in France and Italy, fell sharply. BNP Paribas and Credit Agricole, fell 4.3 and 5.5 percent respectively.
The STOXX Europe 600 Banking sector index fell 3.7 percent, and has lost 38.5 percent in 2011.
Worries about debt-heavy Belgium's ability to form a new government and rein in its deficit have pushed up spreads of Belgian 10-year bonds over benchmark German Bunds this month. Spreads reached euro era highs of 314 basis points last week and have stayed just below these levels since, and Belgian financial group KBC fell 13.2 percent.
TECHNICALS AND OPPORTUNITIES
Monday's falls took the pan-European index well below its 50-day moving average, a key support level in recent days. It was looking like a convincing break of support, with the next target at 910 or so, said Bill McNamara, technical analyst at Charles Stanley.
The recent weakness in equities means dividend yields are rising. Investors have an unusual opportunity to invest in stocks paying an ultra high dividend of more than 8 percent, according to HSBC, which says such companies will outperform going forward, even though many will end up cutting their dividend.
HSBC said there were 43 stocks in then MSCI Europe index with a trailing yield of more than 8 percent. Among those it identified were: Banco Santander, Nokia and Peugeot.
The classic dilemma for investors is to decide whether these high yields represent a value opportunity or whether it is a sign of distress. It turns out that there is an element of truth in both views, HSBC said.
(Editing by Greg Mahlich)