European stocks edge down, Fed and Suez in focus

LONDON, Mar 27 (Reuters) Caution ahead of the Federal Reserve's monetary policy meeting pushed European shares slightly lower on Monday while French utility Suez continued to weaken from a multi-year as a merger saga drags on.

European stocks are near five-year highs thanks to takeover activity, but a new round of bid rumours about consumer electronics group Thomson and spin-off talk surrounding Philips failed to improve the mood.

By 1040 GMT (1610 IST), the FTSEurofirst 300 index of leading European shares was 0.15 per cent weaker at 1,381.17 points, having earlier touched 1,384.78, its highest level since July 2001.

France's CAC 40 and Britain's FTSE 100 fell 0.4 per cent while Germany's DAX eased 0.1 per cent.

Despite the dip, strategists still see strength in European equities.

''We think that many investors will shift towards an attitude of playing the momentum market by asking 'what's going up next?' While this is a rather simplistic investment approach, it would be a phenomenon that has been seen before,'' said Christian Katz at JP Morgan.

''We believe there are two key thematic trades. For one, avoid risky short ideas. Secondly, buy the laggards.'' For the moment, the market is focused on the Fed, which is widely expected to raise the key U.S. borrowing rate by 25 basis points to 4.75 per cent on Tuesday. Investors will be hoping for any hints on when the monetary tightening will end.

U.S. stock index futures were pointing to an opening rise on Wall Street despite interest rate jitters.

SUEZ FALLS French utility Suez dropped 1 per cent to 33.45 euros after the company said it had rejected demands from Belgium to sell some of its assets as a condition for merging with Gaz de France.

The stock has lost around 8 per cent since hitting a more-than four year high of 36.15 euros on March 15.

Italy has protested about what it regards as protectionist French intervention in a possible merger of Suez and Gaz de France. Italy's Enel has also expressed interest in buying Suez.

Austrian energy group OMV, Europe's top performer in 2005 when it rose over 120 per cent, also fell Monday. Its shares slipped after JP Morgan cut its rating to ''underweight'' from ''neutral''.

Dutch chemicals group Akzo Nobel NV fell on a lack of hard news after it said its pharmaceutical unit aimed to file at least one new product per year to boost growth.

On the upside, Dutch electronics group Philips rose over 2 per cent on renewed expectations it could spin off its semiconductor business.

''Philips' announcement that it plans to form a separate legal entity for their semiconductor business, could pave the way for a potential listing, sale or merger within the next 12 months,'' UBS analysts said in a note.

''Of these options, a merger could best enable Philips to achieve economies of scale while reducing earnings volatility.'' Thomson rallied 7 per cent after the Business newspaper reported that investment banks were putting together a consortium to bid more than 5 billion euros for the consumer electronics group.

DaimlerChrysler added 1.5 per cent after weekend news of plans to halt production of its four-door Smart car sparked price-target upgrades from Morgan Stanley and Lehman.

REUTERS SD KN1658