July 8 (Bloomberg) -- European stocks fell, sending the Dow Jones Stoxx 600 Index to the lowest in three years, as concern deepened financial firms will need more capital and slumping commodity prices weighed on energy and basic-resource shares.

Credit Suisse Group AG and Deutsche Bank AG retreated as analysts said the two largest U.S. mortgage finance companies may have to raise a combined $75 billion. Bank of Ireland Plc tumbled after the lender said slowing economic growth is ``adversely impacting'' earnings. Royal Dutch Shell Plc and Anglo American Plc followed crude oil and metals lower.

The Stoxx 600 dropped 1.5 percent to 278.97, extending its 2008 decline to 23 percent. The U.K.'s FTSE 100 Index averted a bear market at the close after earlier extending its retreat from last year's high to 20 percent.

``Investors are nervous,'' said Chicuong Dang, an analyst at Richelieu Finance in Paris, which has $6.2 billion under management. ``The market is falling on fears of bad news from banks, of new writedowns and need for recapitalization.''

Stocks extended declines as a report showed U.S. home sales slumped more than forecast. Contracts to buy previously owned U.S. homes slipped 4.7 percent in May, the National Association of Realtors said.

Financial stocks from UBS AG and HBOS Plc to Fannie Mae have led declines that erased more than $11 trillion from equity markets worldwide this year as credit-related losses topped $400 billion, forcing banks to raise more than $320 billion in capital and threatening to push the U.S. into recession.

`Earnings Always Fall'

``In a recession, earnings always fall,'' said Joost van Leenders, Amsterdam-based investment specialist for asset allocation at Fortis Investments, which oversees $342 billion. ``There is more to come in earnings and the stock market than is currently foreseen.''

National indexes dropped in all 18 western European markets today. Germany's DAX lost 1.4 percent while France's CAC 40 slipped 1.5 percent.

Profit for Stoxx 600 companies will drop 2 percent this year, according to data compiled by Bloomberg. That's down from 11 percent growth predicted at the start of 2008.

Alcoa Inc., the world's third-largest aluminum company, kicks off the second-quarter reporting season in the U.S. today. Analysts estimate earnings at companies in the S&P 500 declined 11 percent on average in the quarter, Bloomberg data show.

Sales of services and manufactured goods in the U.K. fell in the second quarter, posing ``serious risks'' the economy will tumble into a recession, the British Chambers of Commerce said.

Bank Shares

Credit Suisse, Switzerland's second-largest bank, fell 3.2 percent to 42.18 francs. Deutsche Bank, Germany's largest bank, slipped 2.6 percent to 53.15 euros.

Analysts at Lehman Brothers Holdings Inc. said yesterday that a change in accounting rules may force Fannie Mae and Freddie Mac to raise $46 billion and $29 billion respectively.

Bank of Ireland tumbled 11 percent to 4.51 euros after the Dublin-based lender said slowing economic growth in Ireland and the global shortage of credit are ``adversely impacting'' earnings.

``The slowdown in the overall level of activity and volume growth is most pronounced in our retail businesses in Ireland,'' the bank said.

Separately, the Daily Telegraph reported Bank of Ireland is reducing its commercial lending, telling some U.K. customers it won't be taking new business for the next three months.

Bradford & Bingley

Bradford & Bingley Plc, the biggest lender to U.K. landlords, plunged 19 percent to 34 pence on concern that new capital won't resolve its funding and mortgage risks.

Chairman Rod Kent, backed by underwriters Citigroup and UBS and investors including Standard Life Plc, plans to raise 400 million pounds this month by selling shares. Bradford & Bingley traded this week below the 55 pence price of the rights offering.

Shell, Europe's largest oil producer, declined 2.3 percent to 1,995 pence, while Total SA, the region's third biggest, lost 2 percent to 51.49 euros. Oil in New York posted its steepest drop since March.

Anglo American, the world's second-largest mining company, retreated 4.9 percent to 3,004 pence. Copper, nickel, tin and zinc fell in London.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

Last Updated: July 8, 2008 13:20 EDT