Aug. 9 (Bloomberg) -- European stocks declined after BNP Paribas SA, France's biggest bank, halted withdrawals from funds and surging demand for cash drove overnight lending rates higher.

BNP fell the most in more than two months. Commerzbank AG, which reported better-than-expected earnings today, and Deutsche Bank AG also retreated.

The Dow Jones Stoxx 600 Index lost 1.8 percent to 374.28. Stocks dropped around the world last month on concern the debacle in the U.S. mortgage market will hurt economic growth, slow takeovers and reduce the value of investments.

``Investors will remain wary until it becomes clear whether the problems in the credit markets, which have hit a number of companies such as BNP, have real economic consequences,'' said Richard Scott, who helps oversee about $1 billion at Iimia Investment Group in Exeter, England. ``The more prevalent the problems in the credit market become, the greater the chance of an economic fall-out that would lead to a more sustained decline in equity markets.''

The European Central Bank, in an unprecedented response to a sudden demand for cash from banks, loaned 94.8 billion euros ($130.2 billion). Overnight lending rates banks charge each other jumped to the highest in six years. The London interbank offered rate in dollars rose to 5.86 percent today from 5.35 percent and in euros gained to 4.31 percent from 4.11 percent.

`Sign of Panic'

``Today's step by the ECB looks like a sign of panic,'' said Sergi Martin, who helps oversee $9.6 billion at Credit Andorra in Andorra. ``We might see more of this in the coming days.''

BNP slid 3.4 percent to 82.57 euros, the biggest decline since May 24. The bank will temporarily suspend the calculation of net value for the funds, and halt redemptions and new investments. The funds affected are called Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia.

``The complete absence of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,'' the Paris-based company said in an e-mailed statement today.

Commerzbank dropped 4.3 percent to 29.97 euros even as the bank said second-quarter profit more than doubled on a gain from the sale of its Jupiter fund unit. Deutsche Bank, Germany's biggest bank, fell 3.9 percent to 98.6 euros.

``The news from BNP illustrates that market participants can never drop their guard,'' said Stephen Pope, head of equity research at Cantor Fitzgerald in London. ``Sentiment in the banking sector is going to be hit hard.''

National Markets

National benchmarks dropped in all 18 western European markets. The U.K.'s FTSE 100 slid 1.9 percent and Germany's DAX decreased 2 percent. France's CAC 40 lost 2.2 percent. The Stoxx 50 sank 1.9 percent, while the Euro Stoxx 50, a measure for the euro region, fell 2 percent.

Indexes rose in the previous two days on speculation the rout in global equities was overdone.

NIBC Holding NV, a Dutch investment bank owned by a group including J.C. Flowers & Co., said it lost at least 137 million euros on U.S. subprime mortgage investments this year. The bank isn't publicly traded.

The risk of owning corporate bonds in the U.S. and Europe rose today, according to traders of credit-default swaps. The yield on the U.S. 10-year note declined almost 8 basis points to 4.80 percent in New York. The yen gained against all of the 16 most-active currencies as traders pared riskier investments funded by borrowing the currency.

Nobel Biocare, International Power

Nobel Biocare Holding AG tumbled 8.2 percent to 340 Swiss francs, the most since October 2003, after the world's largest maker of dental implants reduced its sales forecast for the year.

International Power Plc dropped 2.2 percent to 439.5 pence. The owner of electricity plants on four continents said first- half profit fell after it committed to prices for future output below actual rates.

Orkla ASA tumbled 12 percent to 97.3 kroner. Profit before interest, tax and amortization was 1.19 billion kroner ($206 million) in the second quarter, missing estimates of 1.4 billion kroner, as raw material prices weighed on the company's food and solar-energy units.

OC Oerlikon Corp. dropped 15 percent to 412 francs, the steepest drop since October 2002. The Swiss supplier for makers of microchips and solar panels said late yesterday it will buy back as much as 2.6 percent of its stock to finance acquisitions and fund employee share plans. The buyback will reduce the amount of freely traded shares.

``It's bad news,'' said Armin Rechberger, an analyst at Zuercher Kantonalbank in a telephone interview today. The buyback ``makes it very likely that they won't have the 20 percent float needed and will drop out'' of two Swiss stock indexes.

OMX, Rheinmetall

OMX AB jumped 6.7 percent to 231.5 kronor. The Dubai stock exchange said it started a process to acquire at least 25 percent of the Nordic exchange operator.

Rheinmetall AG dropped 4.9 percent to 57.99 euros after Goldman, Sachs & Co. removed the German maker of car parts and military equipment from its ``conviction buy'' list.

Assa Abloy AB slumped 2.5 percent to 144.5 kronor. The world's biggest lockmaker said second-quarter net income more than doubled to 820 million kronor. Sales climbed 8.3 percent to 8.33 billion kronor. Analysts had expected net income of 855 million kronor on sales of 8.39 billion kronor.

Standard Life Plc, the best-performing U.K. life-insurance stock this year, retreated 6.5 percent to 318.75 pence after Cazenove cut its recommendation on the stock to ``in-line'' from ``outperform.'' The shares have risen 7.8 percent this year.

To contact the reporters on this story: Sarah Thompson in London at sthompson17@bloomberg.net

Last Updated: August 9, 2007 12:03 EDT