The DAX index in Frankfurt soared to a record high yesterday as traders expressed relief that the millennium bug failed to wreak any damage on the computer systems in big companies.
But the early gains that enabled the DAX to breach 7,000 for the first time in its history were wiped out in afternoon trading as shares in banks and financial institutions declined and the index ended the day more than 200 points lower than its closing level last week.
It finished at 6,750.76, down 2.98 per cent or off 207.38.
Financial shares were hit by fears that Chancellor Gerhard Schroder's plan to abolish tax on sales of cross shareholdings may not come into force in its present form. The plan would make it easier for German banks to sell their large holdings in many of the country's biggest firms.
The market also reacted to anxiety that the European Central Bank (ECB) might raise interest rates sooner than previously expected.
The bank's governing council meets in Frankfurt tomorrow but is unlikely to increase rates immediately - not least because Germany's biggest unions are due to start their annual round of wage negotiations.
A higher interest rate could persuade unions to demand bigger pay increases, feeding the danger of inflation that the ECB is pledged to combat.
High-tech companies and tele coms groups led the stock market surge in Frankfurt yesterday, with shares in the software company SAP rising by 4.51 per cent.
Analysts explained the rise in information technology shares on the basis that traders expected businesses to invest more in new software now that they no longer had to spend money ensuring their systems were Y2K compliant.
Deutsche Telekom and Siemens were the other big gainers but Mannesmann, the German firm that is the target of a hostile takeover bid by VodafoneAirTouch, lost ground.
Mr Kai-Uwe Dohne, an analyst at the Frankfurt Sparkasse, warned that the DAX, which gained almost 40 per cent in va lue during the last three months of 1999, could be in for a major correction before the end of January.
"The strong gains we made since the beginning of October first need to be digested," he said.
