Aug. 14 (Bloomberg) -- European stocks fell, snapping four straight weeks of gains for the Dow Jones Stoxx 600 Index, as a drop in U.S. consumer confidence added to speculation the rally in equities has outpaced the prospects for an economic recovery.

Volkswagen AG plummeted 16 percent after saying it will pay about 3.3 billion euros ($4.7 billion) for a stake in Porsche SE’s automotive unit. Air France-KLM Group lost 3.6 percent as Citigroup Inc. recommended selling shares of Europe’s biggest airline. Swatch Group AG, the world’s largest watchmaker, jumped 13 percent after saying sales show “signs of recovery.”

The Stoxx 600 retreated 0.7 percent to 228.77, extending its weekly drop to 0.8 percent. The measure has climbed 45 percent since March 9, pushing the gauge’s valuation to 39.9 times the profit of its constituent members, the highest ratio since September 2003, according to weekly data compiled by Bloomberg.

“We’ll see perhaps a weaker recovery than people are expecting,” Richard Lacaille, London-based chief investment officer at State Street Global Advisers, which has about $2 trillion under management, said in a Bloomberg Television interview. “When looking at consumer confidence and retail sales, you can’t say we’re in for a sharp V-shaped recovery. We need sustainable elements to get a sustainable stocks advance.”

The Reuters/University of Michigan preliminary index of U.S. consumer sentiment decreased to 63.2 this month from 66 in July as concern over jobs and wages grew. Economists had forecast the gauge would rise to 69, according to the median of 61 projections in a Bloomberg News survey.

Benchmark Indexes

National benchmark indexes slid in 12 of the 18 western European markets. The U.K.’s FTSE 100 declined 0.9 percent and Germany’s DAX slumped 1.7 percent. France’s CAC 40 retreated 0.8 percent.

Volkswagen sank 16 percent to 190.70 euros, the steepest drop since November. Europe’s biggest carmaker will pay about 3.3 billion euros for a 42 percent stake in Porsche’s automotive unit as it executes a gradual merger of the two manufacturers.

Porsche shares gained 8.7 percent to 48.50 euros. The maker of the 911 sports car said Qatar will buy a 10 percent stake and take over most of its options for Volkswagen shares as part of the merger agreement.

“Now that the situation is somewhat clearer, the markets and investors in Porsche and VW can make more reasonable judgments of the investment prospects and their involvement in the proposed capital increases,” John Buckland and Robert Ashton, analysts at MF Global in London, wrote in a report.

Air France lost 3.6 percent to 9.99 euros after Citigroup downgraded the shares to “sell” from “hold.”

Swatch Sales

Swatch soared 13 percent to 237 Swiss francs, leading a rally by luxury-goods companies. The company reported a 28 percent decline in first-half profit to 299 million francs ($279 million) after consumers cut spending on Omega and Breguet timepieces. That beat the 259 million-franc median estimate in a Bloomberg survey.

Second-half sales should match the level of the same period last year, and revenue of “several important” brands may even rise, the company said.

Bulgari SpA, an Italian jeweler, jumped 10 percent to 5.26 euros. LVMH Moet Hennessy Louis Vuitton SA, the world’s biggest luxury group, advanced 3.3 percent to 65.62 euros.

A measure of telecommunications shares on the Stoxx 600 fell 1.7 percent after Bank of America Corp. strategists cut their recommendation on European phone stocks to “neutral” from “overweight.” The strategists said they favor industries more likely to benefit from the economic recovery, which is “now increasingly confirmed in the hard data.”

Vodafone, France Telecom

Vodafone Group Plc, the world’s biggest mobile-phone company, slipped 2 percent to 126.4 pence. France Telecom SA, Europe’s third-largest phone company, declined 1.8 percent to 17.36 euros.

Real-estate stocks rose 2.4 percent, the most among the 19 industry groups in the Stoxx 600.

British Land Co. surged 3.9 percent to 512.5 pence after the Daily Telegraph said the owner of London’s Broadgate office complex may be a 10 billion-pound ($17 billion) bid target for a group of foreign investors, citing unidentified people familiar with the situation. Gordon Simpson, a spokesman for British Land, declined to comment.

Takeover Offer

The real-estate investment trust is unlikely to get a takeover offer because it would probably be rejected by shareholders, analysts at JPMorgan Cazenove Ltd. said. The Wall Street Journal reported that British Land hasn’t received an approach from potential bidders, citing a person familiar with the company.

Hammerson Plc, which owns stakes in shopping malls such as London’s Brent Cross, climbed 1.7 percent to 404.1 pence.

Taylor Wimpey Plc rallied 6.7 percent to 42.99 pence. Britain’s largest homebuilder by sales was upgraded to “buy” from “hold” at Royal Bank of Scotland Group Plc.

ThyssenKrupp AG, Germany’s largest steelmaker, advanced 2.1 percent to 23.15 euros after its third-quarter loss before tax and one-time items beat analyst estimates.

Allied Irish Banks Plc jumped 6.2 percent to 2.23 euros. Ireland’s second-biggest lender said it received an approach from an unidentified third party seeking a minority stake.

Papermakers advanced after Bank of America raised Stora Enso Oyj, Europe’s biggest paper producer, and UPM-Kymmene Oyj, the second-largest, to “buy” from “underperform.”

Stora Enso rallied 5.4 percent to 4.68 euros. UPM jumped 4.2 percent to 8.21 euros.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

Last Updated: August 14, 2009 13:11 EDT