Fears Over Drugmakers` Profits Cut European Shares

AstraZeneca shed 5.6 percent, Sanofi-Aventis dropped 4.7 percent and Roche lost 2.2 percent.

European stocks slid in early trade on Friday, wiping out nearly all the previous session's gains, with pharma shares falling on fears the U.S. budget proposal could curb profits. U.S. President Barack Obama's budget proposal, unveiled on Thursday, includes a plan to expand healthcare coverage and curb costs, calling for cutting Medicare payments to private insurers, letting consumers buy cheaper medicines and preventing drug companies from making deals that block generic competition.

AstraZeneca shed 5.6 percent, Sanofi-Aventis dropped 4.7 percent and Roche lost 2.2 percent.

"The Obama plan will trim drug prices but this will take time and could be compensated by gains in volumes because the idea is to widen the access to health care. There is nothing alarming in this, the market is overreacting," said one Paris-based analyst.

At 0932 GMT, the FTSEurofirst 300 index of top European shares was down 2 percent at 718.08 points. The index, which had gained 2.3 percent on Thursday, is on track to record a loss of 10 percent in February -- the benchmark's sixth consecutive month of losses.

The banking sector was also on the downside, with Lloyds Banking Group down 15 percent after it unveiled a massive loss for 2008 and said it had not yet finalised details of its plan to put billions of pounds of assets into a UK government-backed insurance scheme.

"Whilst it is near certain that Lloyds will participate in the scheme and that an announcement is imminent, until we see the terms agreed this may throw a few question marks over the cost of participating for other banks," said Martin Slaney, head of derivatives at GFT.

The DJ Stoxx banking index was down 2.9 percent, with Santander down 2.7 percent, Deutsche Bank down 4.1 percent and BNP Paribas down 3.1 percent.

Around Europe, UK's FTSE 100 index was down 1.5 percent, Germany's DAX index down 1.9 percent, and France's CAC 40 down 1.7 percent.

The financial sector was also in the spotlight after news the U.S. government and Citigroup reached a deal in which the government would substantially raise its stake in the bank in a bid to stabilise the lender's balance sheet.

However the news was eclipsed by Fannie Mae's massive loss. The government-controlled mortgage giant seen by the U.S. administration as a key conduit to stabilise the housing market, reported a $25.2 billion fourth-quarter loss, forcing it to ask for $15.2 billion from the U.S. Treasury.

Grim news also came from the macro side, with Japan's factory output falling by a record 10 percent in January, in line with market expectations, dragging down the number of new jobs on offer as well as spending by households, while India's economy slowed more than expected in the October to December quarter, with annual growth falling to 5.3 percent from 7.6 percent the previous quarter.