European markets fell back following a firm performance in the previous session, and sectoral effects of the US attacks continued weakness in airlines, financials and companies vulnerable to consumer confidence.

Airlines saw no let-up in the intense pressure they have suffered following last week's terrorist outrages in the US. The sector was already on the slide when the European Commission said there would be no relaxation of strict rules for cash injections to airlines. These ban governments from bailing out ailing carriers more than once. The 10 leading European carriers have collectively lost around 30 per cent of their value in the week since the attacks in New York and Washington.

KLM was among the main losers, down 14.1 per cent to €8.50, after the group said it expected an operating loss for 2001 as a result of the attacks on the US. The shares, which tumbled 30 per cent last week, after the US attacks, had recovered 7.6 per cent on Monday. ABN Amro added to the gloom with downgrades for some other leading players, saying the attacks had changed the outlook for the entire industry.

"The uncertainty surrounding the outlook for the economic environment and the impact on global travel volumes means that earnings visibility, which is traditionally opaque, is effectively zero," the bank said. "Massive losses at the traditional carriers are inevitable. The key issue in the medium term will be survival." Among the stocks it downgraded, Lufthansa dropped another 9.3 per cent to €10.25 while Alitalia fell 5.7 per cent to 66 cents.

The financial sector remained in focus as JP Morgan cut its earnings forecasts for European banks across the board by 4 per cent for 2001 and 13 per cent for 2002, pointing to the "deteriorating macroeconomic and market environment". The investment bank said larger earnings cuts related to wholesale banks but it had also lowered forecasts for retail banks.