Stocks hit after euro hopes dashed

AUSTRALIAN shares yesterday had their biggest fall in more than four weeks as renewed concerns about Europe's ability to manage its debt crisis and signs of a slowing Chinese economy sliced more than 2 per cent from the local market.

Rising investor hopes over the past week that Europe was close to resolving its financial problems were dashed on Monday night when German politicians said it would take months to arrive at a plan to recapitalise the region's banks and to boost the firepower of its all-important stablisation fund.

At the close of Australian trading yesterday, the benchmark S&P/ASX 200 Index was down 88.5 points, or 2.07 per cent at 4186.9.

The dollar also dropped, finishing the local session down just over US1? at $US1.0204. Last night it was trading at $US1.0135.

The falls coincide with the anniversary today of the 1987 Black Monday crash when sharemarkets around the world nosedived and Wall Street lost nearly a quarter of its value.

While a significant announcement is still due at the weekend, EU leaders' summit in Brussels, German officials said more work will be needed to bring an end to the euro-zone crisis.

German Chancellor Angela Merkel's office knocked down what it called ''dreams'' that the last word in taming the crisis would be reached at the summit next Sunday.

And in a sign of continuing crisis, ratings agency Moody's warned France in a that it might place a negative outlook on its cherished Aaa credit rating in coming months, because the nation's financial strength had weakened.

The Australian sharemarket's losses accelerated after official figures from China showed its massive economy had pulled back from fast-paced growth in the third quarter.

China's economy grew at an annual pace of 9.1 per cent in the quarter, down from 9.5 per cent in the previous three months. This was slightly below consensus forecasts and was seen as evidence that measures to rein in inflation were taking hold.

Despite the slowdown, analysts said China was on track for a soft landing rather than a shock.

Earlier, high-profile hedge fund manager Jim Chanos had warned that China was heading for a hard landing.

Commonwealth Bank credit market analyst Alex Stanley said the relative optimism that has returned to markets in recent weeks has been undercut by ''setback and disappointment'' in Europe.

''The fiscal problems in Europe are structural and there are implementation risks facing any new crisis policies,'' Mr Stanley said.

In local trade, resource stocks were the hardest hit. Rio Tinto slumped $3.70, or 5.3 per cent, to $66.25 while BHP Billiton lost $1.25 or

3.3 per cent, to $36.40.

Fortescue Metals Group dived 47?, or 9.2 per cent, to $4.64 and Woodside Petroleum slipped 39?, or

1.1 per cent, to $34.98.

Banks and financials were also sold off, led by NAB, which closed down 52?, or 2.1 per cent, at $24.23.