Feb. 21 (Bloomberg) -- European stocks posted the biggest weekly drop in two months, sending the Dow Jones Stoxx 600 Index to the lowest level since March 2003, as concern grew the economy will deteriorate further and companies from Daimler AG to Cie. de Saint-Gobain SA reported disappointing earnings.

Swedbank AB and UniCredit SpA led a sell-off in financial shares after Moody’s Investors Service said it may downgrade banks with units in eastern Europe. Axa SA tumbled 30 percent as Standard & Poor’s cut its credit outlook for the insurer. Daimler, the largest truckmaker, and Saint-Gobain, Europe’s biggest supplier of building materials, sank at least 15 percent.

The Stoxx 600 dropped 7.5 percent this week to 176.93 as all 19 industry groups retreated except food and beverage companies. The gauge is down 11 percent this year as companies from Electricite de France SA to Diageo Plc fueled concern the global economic slump will wipe out profits and U.S. Treasury Secretary Timothy Geithner failed to convince investors that his plan to rescue U.S. banks will work.

“It was a very disillusioning week, especially the uncertainty over exposure to eastern Europe,” said Peter Braendle, who manages $50 billion at Swisscanto Asset Management in Zurich. “We are on very low levels and there are still a lot of uncertainties surrounding the financial industry.”

U.S. housing starts slid to an annual rate of 466,000 in January, according to figures from the Commerce Department. A report from the Federal Reserve showed industrial output decreased 1.8 percent in January. Both figures were worse than the average economist forecast in a Bloomberg survey.

U.K. Economy

The U.K.’s GDP will decrease 3.3 percent this year, instead of the 1.7 percent predicted in November, the Confederation of British Industry said. By the end of 2009, the economy will have contracted for six consecutive quarters, the business lobby said.

Governments around the world have stepped up measures to stem the worst global recession since World War II. U.S. President Barack Obama this week pledged $275 billion in a program that will help as many as 9 million struggling homeowners restructure or refinance their mortgages to avoid foreclosure.

National benchmark indexes fell in all of the 18 western European markets. Germany’s DAX Index dropped 9 percent, while France’s CAC 40 declined 8.3 percent. The U.K.’s FTSE 100 lost 7.2 percent as Anglo American Plc and Xstrata Plc slid.

Insurers and banks were the worst-performing industry groups in the Stoxx 600 this week, dropping more than 14 percent each.

Banks Tumble

Moody’s said eastern European banks are likely to come under “downward pressure” which may weaken their parent companies.

Swedbank, the biggest bank in the Baltic region, dropped 14 percent. SEB AB, the second-largest, tumbled 27 percent.

Italy’s UniCredit, which owns Poland’s Bank Pekao SA as well as operations in Ukraine, Kazakhstan and Russia, slid 32 percent.

Banks from Sweden, Italy, Austria, France, Belgium and Germany account for 84 percent of western European bank loans in eastern Europe. The region’s economies are weakening, with the International Monetary Fund already offering aid to Latvia, Hungary, Serbia and Ukraine.

Axa, Europe’s third-largest insurer, plunged 30 percent. Standard & Poor’s cut its credit outlook on the company to “negative” from “stable,” citing a possible drop in earnings from life insurance and asset management. The company posted a second-half loss for the first time in seven years and cut its dividend as the biggest slump in stock markets since the Great Depression eroded the value of investments.

‘Most Difficult’

Aegon NV decreased 16 percent. The insurer had its senior debt rating cut to A3 from A2 at Moody’s. Aegon posted a fourth- quarter loss of 1.2 billion euros ($1.5 billion). That exceeded analysts’ estimates for an 818 million-euro loss.

Profits have declined 82 percent for 171 companies in the Stoxx 600 that have released results since Jan. 12, Bloomberg data show. Analysts expect profits to rise 4.4 percent in 2009 after tumbling 29 percent last year, according to estimates compiled by Bloomberg.

“This environment is clearly a tough one for corporate earnings,” said Leigh Harrison, head of U.K. equities at Threadneedle Asset Management Ltd. in London. “We expect the forthcoming reporting season to be one of the most difficult in recent memory.”

Daimler dropped 15 percent. The automaker reported its first quarterly loss since 2007 on declining sales and costs from Chrysler LLC and said shrinking car markets will impose “substantial burdens” on earnings this year.

Commodity Producers

Saint-Gobain slid 19 percent. The company plans to sell 1.5 billion euros of new shares to shore up capital eroded by slowing construction markets. Net income dropped 7.3 percent to 1.38 billion euros last year. The global economic crisis makes the 2010 targets set in 2007 “obsolete,” the company said.

Anglo American plunged 20 percent. The mining company that controls the world’s biggest platinum producer suspended dividend payments and share buybacks after earnings slumped and announced plans to slash 19,000 jobs to retain cash.

A measure for basic-resource companies in the Stoxx 600 declined 12 percent this week as metal prices slid. Xstrata, Europe’s largest zinc producer, lost 16 percent. ArcelorMittal, the world’s biggest steelmaker, retreated 15 percent.

Carlsberg A/S climbed 9.5 percent. The biggest Nordic brewer said fourth-quarter profit more than tripled to 124 million kroner ($21 million), boosted by the purchase of assets from Scottish & Newcastle Plc, and said it would cut costs as sales stagnate. Earnings beat analysts’ estimates.

Nestle SA gained 4.5 percent after the world’s largest food company signaled that sales will hold up better than some analysts expected. The company aims for sales growth excluding acquisitions, disposals and currency swings to “at least approach” 5 percent. Analysts predict a 3.7 percent gain in 2009.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

Last Updated: February 21, 2009 03:34 EST