Eurostoxx50: 2,695.29 (-19.76) Frankfurt DAX: 7,214.74 (-53.13) Paris CAC: 3,751.23 (-42.04)

EUROPEAN STOCKS fell yesterday, after Italy auctioned bonds and Moody's Investors Service said the American government may lose the Aaa credit rating it has held since 1917.

"Moody's action overnight was a response to the small but rising risk of a short-lived default," wrote Jim Reid, a global strategist at Deutsche Bank in London, in a report yesterday. "Moody's is now the rating agency putting most pressure on Congress to act."

Moody's put the US on review for the first time since 1996 as talks to raise the country's $14.3 trillion debt limit stalled, adding to concern that political gridlock will lead to default.

Even a temporary default will probably have "large systemic effects" on the economy and Treasury finances by disrupting money funds, the repurchase-agreement market and foreign investors' willingness to buy the government's debt, according to JPMorgan.

Italy sold five-year bonds at the highest yield in three years. The Treasury priced €1.25 billion of 2016 bonds yesterday at an average yield of 4.93 per cent, compared with a yield of 3.9 per cent at a previous auction in June.

Greece's credit rating was cut three levels to Fitch Ratings' lowest grade for any country in the world as the company followed rivals and said that a default is a "real possibility".

Petrofac dropped 3.7 per cent to 1,446p after the company was downgraded to "underweight" from "equal weight" at Barclays.

Software tumbled 15 per cent to €35.80 for the biggest decline in the Stoxx 600 as Germany's second-largest maker of business software reported second-quarter revenue that missed analysts' estimates.

SAP slipped 2.7 per cent to €40.94.

Accor and Intercontinental Hotels fell 1.8 per cent to €29.76 and 3.2 per cent to 1,241p, respectively, after rival Marriott forecast third-quarter earnings of 25 to 29 cents per share.

Daily Mail and General Trust slumped 4.1 per cent to 421.3p after saying that advertising sales declined 7 per cent in the 13 weeks through July 3rd.

Mothercare fell 1.4 per cent to 405p as first-quarter UK comparative sales declined 4.3 per cent.

Storebrand surged 5.5 per cent to 46.48 kroner. - (Bloomberg)