LONDON: European shares retreated from near six-month highs as concerns deepened that Greece might head towards a disorderly default and technical analysts said the recent rally could be coming to a close.
The banking sector, much of which is heavily exposed to peripheral euro zone countries and has taken a hit on their balance sheets following the debt crisis, suffered heavily after euro zone finance ministers rejected an offer from private bondholders to help restructure Greece's debts.
Negotiations have been going on for nearly seven months. Failure to reach a deal by March, when Athens must repay 14.5 billion euros of maturing debt, could mean a disorderly default.
"The fear is that if politicians can't agree on something that's been discussed for months now, what hope is there for future negotiations," said Angus Campbell, head of sales at Capital Spreads.
"The longer it drags on, the more equity markets will struggle to head higher."
The STOXX Europe 600 banking index fell 2.4 percent, dragging down the wider stock market. The FTSEurofirst 300 index of top European shares was down 0.9 percent at 1,038.77 points at 1227 GMT. Monday's close was its highest since early August.
Charts show the FTSEurofirst 300 faces strong resistance at around 1,065 points -- its range lows in 2010 and 2011.
A move below 1,020 - where its 21-day and 200-day moving averages converge - would mean the market has topped, said Phil Roberts, chief European technical strategist at Barclays Capital, adding: "Momentum looks to be rolling over in a bearish fashion."
The market did not react to surveys showing a surprise upturn in the euro zone service sector.
Markit's Flash Eurozone Purchasing Managers' Composite Index (PMI) jumped to 50.4 from December's 48.3, its highest reading in four months. Germany and France supported growth in the bloc, the rest of which continued to contract.
"It seems to be the same old story - strengths in Germany that masks weaknesses elsewhere," said Richard Greenwood, fund manager at Bedlam Asset Management, which manages $700 million.
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"We have taken some profits recently. There is a feeling that the market has contrasted with the macro picture, which hasn't really got any better. May be we are going a little bit overvalued at the moment," Greenwood added.
Technology shares also came under pressure, with the sector index down 1.9 percent.
Nokia fell more than 7 percent after lacklustre reports overnight from suppliers Texas Instruments, STMicroelectronics and Ericsson. Ericsson shares fell 1 percent.
Europe's biggest chip maker STMicroelectronics was down 5.6 percent after fourth-quarter results showed deep problems at its mobile joint venture that analysts warned could force it to miss out on a tech sector revival.
"Going forward caution remains part of our strategy. Global growth is slowing and the earnings season has been the weakest in quite a while. There are less companies that beat on earnings and those who do often do it on lower revenue," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
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