LONDON (CNNfn) - Europe's major equity markets all closed around 1 percent lower Wednesday as investors sold off the telecom and manufacturing stocks that had fueled a two-session rally across bourses, though drug and energy shares posted firm gains.
The euro slipped back after the European Central Bank left its key interest rate unchanged at 4.25 percent.
Frankfurt's Xetra Dax was the weakest in the region, ending down 127.18 points to 7,100.09, a 1.76 percent loss. It earlier fell below 7,100 amid a sell-off in the financial-services, retail and telecom sectors. Deutsche Telekom lost more than 3 percent.
The blue-chip CAC 40 in Paris closed down 0.98 percent at 6,477.80, some 30 points above its session floor, with a 3 percent fall in France Telecom shares and sharp drops in other telecom and auto stocks pulling the market back.
London's FTSE 100 index continued to lose ground after a modest opening gain to close at 6,477.8, a loss of 0.75 percent, with financial and telecom stocks losing ground while advances among drug stocks pared the market's decline. Mobile-phone operator Vodafone AirTouch slid more than 2 percent.
 The pan-European FTSE Eurotop 300, a broader index of the region's largest stocks, ended down 0.89 percent at 1,614.17, with its telecom sub-index off 2.75 percent. Drug shares gained almost 1 percent.
On Wall Street, the Nasdaq composite index and the Dow Jones industrial average both were down 0.2 percent at the close of business in Europe.
In the currency market, the euro slid against the dollar to 94.70 U.S. cents, after climbing as high as 95.40 from 94.45 in late New York trade Tuesday.
The ECB left its key interest rate unchanged at 4.25 percent in a widely expected move Wednesday, following a half-percentage point hike two weeks ago. Many analysts expect rates to peak at 5.5 percent this year, with the next move expected in the third quarter.
Telecoms weigh on Paris
In Paris, France Telecom (PFTE), the biggest component on the CAC 40, dragged the Paris market lower to close 3.3 percent lower, extending earlier losses. Bouygues (PEN), the operator of France's third-largest mobile phone firm, lost 3.2 percent.
Defense electronics firm Thomson-CSF (PHO) was the weakest performer, ending 6.5 percent lower.
 Retailer Pinault-Printemps Redoute (PPR) lost 2 percent after breaking off talks Tuesday to acquire shares in Italian luxury goods maker Gucci from LVMH (PMC). Gucci shares rose 3 percent in Amsterdam.
Auto shares also lost ground, with Peugeot (PUG) off 3.1 percent while Renault (PRNO) ended 3.5 percent lower.
Vivendi (PEX), a utility and media conglomerate, was one of a handful of gainers, with a 1.7 percent rise. That pared the previous day's 8 percent slide, which came after it announced a $46 billion three-way merger with Canada's Seagram and French pay-TV operator Canal Plus (PAN), whose own stock ended narrowly ahead.
Telecom equipment maker Alcatel (PSGE) rose 1.4 percent.
P&O holed by Carnival
In London, the market sagged after a brief early move into the black and continued to slide through the session.
Vodafone AirTouch (VOD), the most heavily weighted stock on the FTSE 100, dropped 2.3 percent while former state-owned rival British Telecommunications (BT-A) lost 3.6 percent to drag the benchmark index lower.
Support services company Hays (HAY) was the biggest faller on the FTSE, losing 11.5 percent as investors took a dim view of two acquisitions announced Wednesday. Retailer Marks & Spencer (MKS) fell 5.8 percent as did c  ruise operator Peninsular and Oriental Steam Navigation (PO-) after U.S. rival Carnival Corp. (CCL: Research, Estimates), the world's biggest cruise company, warned profitability is flagging.
Media shares gave up Tuesday's gains in the wake of the Vivendi deal, with music publisher EMI (EMI) shedding 6 percent.
Banking stocks also weighed on the market, with mortgage bank Halifax (HFX) worst hit, taking a 5.1 percent loss.
Oil companies provided some support, with analysts suggesting that members of the Organization of Petroleum Exporting Countries meeting in Vienna would agree only on a limited increase in supplies, keeping oil prices firm. Shell Transport and Trading (SHEL) gained almost 2.5 percent.
Drug shares also climbed, with SmithKline Beecham (SB-) rising 2.8 percent while merger partner Glaxo Wellcome (GLXO) rose 2.7 percent.
The tech shares that had buoyed the market in morning trade all lost ground, mostly returning close to their previous closing levels.
Karstadt sell-off continues
In Frankfurt, Deutsche Telekom (FDTE) held back the market as the largest component on the Dax shed 3.4 percent. Retailer KarstadtQuelle (FKAR) repeated its slide of the previous session, down almost 6 percent. On Tuesday it posted downbeat sales-growth figures for the first five months of the year.
Banks also lost ground, with Commerzbank (FBCK) off 3 percent.
 Drug company Schering (FSCH) fell 4.1 percent amid media reports that Britain's National Institute for Clinical Excellence advised the government that a Schering drug for multiple sclerosis should not be made available via the state-funded National Health Service.
SAP [FSE:FSAP3], Europe's largest software publisher, lost 3.4 percent.
Epcos (FEPC), a maker of electronic components, topped the Dax with a 1.7 percent advance.
Among smaller markets, the AEX in Amsterdam edged up 0.42 percent to close at 684.88, with Royal Philips Electronics up 2.2 percent and chip equipment maker ASM Lithography jumping more than 5 percent.
The Ibex 35 in Madrid fell 1.6 percent and the Mib-30 in Milan fell 0.9 percent. 
-- from staff and wire reports
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