European stocks beat a hasty retreat on Thursday as the prospect of higher eurozone interest rates loomed over the market.

The European Central Bank left rates unchanged at 3.5 per cent after its policy meeting, but Jean-Claude Trichet, president, clearly signalled a quarter-point tightening next month by saying "strong vigilance" was needed to ensure price stability.

Aurelio Maccario, economist at Unicredit MIB, said there had been a moderately hawkish tone to the ECB's press conference, which suggested further rate rises could be in the pipeline.

There had been some hopes in the markets that Mr Trichet might have indicated the ECB could opt for a pause in its rate-tightening cycle after March.

"The economic analysis keeps pointing to a solid macroeconomic framework, with 2007 growth seen above potential and all conditions in place for a broad-based recovery," Mr Maccario said.

"The long-term inflation outlook continues to suffer from upside risks stemming from abundant liquidity, stronger-than-expected wage developments, unfavourable base effects likely to show up at the end of the year, and high capacity utilisation close to 2000 peaks."

The FTSE Eurofirst 300 index fell back from Wednesday's six-year high to close 0.8 per cent lower,

European government bonds also moved lower, with the yield on the 10-year Bund rising 3 basis points.

Meanwhile, sterling fell back after the Bank of England left borrowing costs unchanged at 5.25 per cent, just a month after it shocked the markets with a surprise quarter-point tightening.

But few in the markets feel UK rates have yet reached a peak. "Comments from BoE governor King suggest that the January rate hike failed to neutralise the upside risk to the inflation outlook, suggesting that more rate hikes are likely," said Natascha Gewaltig at Action Economics.

Wall Street came under early pressure as investors were unsettled by banking group HSBC's revelation that its profits would be hurt by bad debts from its US mortgage business.

Weak financial and housebuilding stocks helped drive the S&P 500 down by 0.3 per cent, while the Dow Jones Industrial Average – which touched a record high on Wednesday – was 0.4 per cent lower. The technology-heavy Nasdaq Composite was also off 0.4 per cent.

Asian stock markets made little headway, although Bangkok bucked the weaker trend amid mounting hopes for a cut in Thai interest rates. The SET index rose 2.4 per cent.

In Tokyo, the Nikkei 225 Average ended flat, Singapore fell 0.6 per cent and Seoul came off 0.2 per cent, although Mumbai inched up to a fresh record high.

US oil futures staged a modest rally to hover around the $58-a-barrel mark. An early bout of profit-taking was triggered by a repeated failure to break through $60 earlier this week.

"With the worst of the cold snap possibly ending, participants may be concluding that the weather-induced push higher in crude could start to thaw out as well," suggested Edward Meir at Man Energy.

Source: Financial Times