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German Stocks Slide as Government Rejects Merging Bailout Funds

German stocks declined before a European Union summit this week as Chancellor Angela Merkel’s government said it will prevent the euro area from running its temporary rescue fund alongside its permanent bailout facility.

Metro AG, Germany’s largest retailer, retreated for a second day after analysts downgraded the stock. Deutsche Lufthansa AG fell 3.9 percent as the International Air Transport Association reduced its forecast for airlines’ profit.

The DAX Index dropped 0.6 percent to 5,994.73 at the close in Frankfurt, having earlier climbed as much as 1.8 percent. The benchmark measure retreated 1.3 percent yesterday as Standard & Poor’s put 15 euro-area nations on watch for potential rating downgrades. The broader HDAX Index also declined 0.6 percent today.

“People are getting more pessimistic on the chance of a European Union deal,” said Matthias Jasper, head of equities at WGZ Bank AG in Dusseldorf. “It’s like flipping a coin these days. Everything depends on the outcome of political talks.”

The German government will prevent the temporary European Financial Stability Facility from continuing to operate when the euro area sets up its permanent European Stability Mechanism next year. A German official spoke to reporters in Berlin today on condition of anonymity because the negotiations are private. The Financial Times reported after European markets closed yesterday that the euro area may extend the operating life of the EFSF, potentially increasing the funds available to the 17-nation currency’s most-indebted members.

Geithner Backing

U.S. Treasury Secretary Timothy F. Geithner yesterday urged policy makers to work with central banks to erect a “stronger firewall” to end the crisis. He welcomed “progress toward a fiscal compact for the euro zone,” echoing language used last week by ECB President Mario Draghi.

Metro slipped 2.7 percent to 31 euros, extending its biggest retreat since the company started trading in 1996.

Deutsche Bank downgraded the Dusseldorf-based retailer to “hold” from “buy,” while Citigroup Inc. cut its rating to “sell” from “neutral” and JPMorgan Chase & Co. reduced its recommendation to “neutral” from “overweight.” Metro forecast yesterday that sales and earnings will fall this year following a weak start to the Christmas season.

Deutsche Lufthansa lost 3.9 percent to 9.12 euros, its biggest drop in five weeks. IATA said the airline industry’s profit will fall 49 percent in 2012, more than the trade body previously predicted, as the sovereign-debt crisis in the euro region hurts economic growth. Net income will drop to $3.5 billion this year from $6.9 billion this year.

Deutsche Boerse AG sank 5.5 percent to 42.29 euros. The operator of the Frankfurt exchange is considering an offer to spin off part of the derivatives business as it seeks to convince European Union antitrust regulators to approve a proposed takeover of NYSE Euronext, according to two people familiar with the situation.

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