Jan. 8 (Bloomberg) -- European stocks dropped, sending the Dow Jones Stoxx 600 Index lower for a second day, on concern the deepening economic slump will wipe out earnings growth and curb demand for commodities.

BHP Billiton Ltd. and Rio Tinto Group slid more than 3 percent as copper retreated in London. Carrefour SA tumbled 3.7 percent after Wal-Mart Stores Inc., the world’s largest retailer, cut its fourth-quarter forecast. Infineon Technologies AG, Europe’s second-largest chipmaker, plunged 11 percent after Lenovo Group Ltd. predicted a quarterly loss.

European stock-market volatility increased the most this year as the Dow Jones Stoxx 600 Index trimmed its advance since Nov. 21 to 15 percent. Equities had rallied even as earnings for western European companies tracked by Bloomberg missed analysts’ estimates by 92 percent over the past seven weeks.

“We call it the hard slog,” said Kevin Lecocq, chief investment officer at Barclays Wealth, which manages about $215 billion in assets. “You are going to see horrible numbers until some of the fiscal stimuli start to impact the real economy, which will probably come in the end of 2009 and into 2010,” he told Bloomberg Television in London.

The Stoxx 600 fell 0.7 percent to 208.77. The measure sank 1.9 percent in the past two days as companies from Alcoa Inc. to Intel Corp. spurred concern the profit outlook is worsening. Citigroup Inc. estimates that the downturn in earnings is only a quarter of the way into a 50 percent slide from the peak.

$1 Trillion

The Stoxx 600 has tumbled 43 percent since the start of last year as more than $1 trillion in losses at financial companies eroded profits and the U.S., Europe and Japan fell into the first simultaneous recessions since World War II.

U.S. President-elect Barack Obama warned that without immediate steps by the government to revive the economy, the unemployment rate could rise above 10 percent as the U.S. risks losing a “generation of potential and promise.”

The Stoxx 600 regional benchmark had posted its best ever start to a year before yesterday on speculation efforts by governments and central banks will revive the global economy.

The 505 western European companies tracked by Bloomberg that announced results since the Stoxx 600 began its rebound in November have posted an average 75 percent decline in profit.

Bank of England

Data today showed that confidence in the economic outlook for Europe fell to the lowest on record and unemployment rose to a two-year high, adding to pressure on the European Central Bank for more interest-rate cuts.

The global slowdown prompted the Bank of England to reduce its key interest rate to 1.5 percent today, the lowest since the bank was founded in 1694. The ECB has reduced its benchmark rate by 1.75 percentage points to 2.5 percent since October.

Global equities “need to get more of the bad news out of the way before attempting a meaningful recovery,” Citigroup equity strategists led by Robert Buckland wrote in a note to clients dated yesterday. ING Wholesale Banking said stocks in western Europe will make little headway in 2009 and may test fresh lows in the first half of the year.

BHP, the world’s largest mining company, lost 3.2 percent to 1,292 pence. Rio Tinto, the third-biggest, slid 4.5 percent to 1,730 pence. Copper fell as much as 4.5 percent in London.

Earnings at basic-resource companies in the Stoxx 600 will drop 18 percent this year, according to analysts’ estimates compiled by Bloomberg. That’s the second-steepest decline among 10 industry groups after energy companies, the data show.

Wal-Mart

Carrefour, Europe’s largest retailer, retreated 3.7 percent to 27.88 euros as Wal-Mart said its fourth-quarter profit will miss its earlier forecasts.

Infineon tumbled 11 percent to 1.065 euros after personal computer-maker Lenovo said it expects to post a “material loss” in the quarter ended Dec. 31 and will eliminate about 2,500 jobs. Lenovo sank 26 percent, the most in a decade.

Nokia Oyj, the world’s biggest maker of mobile phones, slipped 4.6 percent to 11.15 euros.

Commerzbank tumbled 14 percent to 5.25 euros. Germany’s second-largest lender will receive additional equity of 10 billion euros ($13.8 billion) from the government.

The capital injection comes as Commerzbank is nearing the completion of its takeover of Dresdner Bank from Allianz SE. As part of the deal, Allianz will boost Dresdner’s capital by a further 1.45 billion euros by taking over some of the bank’s risky assets.

Concern that stock losses will deepen remains elevated even after falling from record levels in October and November.

VStoxx, TED Spread

The benchmark index for European options, the VStoxx Index, rose 2.2 percent to 41.77 today, the biggest gain since Dec. 29. The gauge, which measures the cost of using options as insurance against declines in the Euro Stoxx 50 Index, climbed to 87.51 in October, the highest since at least 2001, data compiled by Bloomberg show.

The difference between what the U.S. government and banks pay to borrow for three months, the so-called TED Spread, is still about three times higher than before credit markets started freezing in August 2007, according to data compiled by Bloomberg.

Treasuries last year returned the most since 1995, according to Merrill Lynch & Co. indexes, with investors seeking the relative safety of government debt as losses and writedowns at the world’s biggest financial companies jumped. The rally has faded this year, with Treasuries falling 1.3 percent, amid concern debt sales will swell to unprecedented levels as Obama boosts spending to halt the recession.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

Last Updated: January 8, 2009 12:09 EST