EUROPEAN stocks dropped for a second week last week, the first back-to-back decline since March, on concern that accelerating inflation will prompt central banks to raise interest rates.

ABB Ltd, the world's largest builder of power networks, and Vinci SA, the biggest construction company, slid. Barratt Developments Plc led UK homebuilders lower after Merrill Lynch & Co recommended selling the shares as the housing market deteriorates. Bayerische Motoren Werke AG slipped after Goldman Sachs Group Inc downgraded the stock.

The Dow Jones Stoxx 600 Index sank 1.5 percent to 305.70, capping its worst two weeks since January. The gauge has fallen 16 percent this year on speculation that credit-related losses approaching US$400 billion and rising oil prices will erode earnings, Bloomberg News said.

"Inflation poses a real problem," said Guillaume Duchesne, a Geneva-based strategist at Fortis Private Banking, which oversees the equivalent of US$117 billion. "We're worried about rising interest rates in the US and Europe. We have difficulty finding positive elements that would sustain a rally in stocks."

ABB lost 4.9 percent. Vinci slid 4.1 percent. Construction and materials shares fell the most among the 18 industry groups in the Stoxx 600. Higher interest rates hurt indebted companies and increase the cost of borrowing.

United States Federal Reserve Chairman Ben S. Bernanke, speaking in Boston last Monday, said policy makers will need to pay "close attention" to make sure a surge in commodity costs doesn't pass through to consumer prices.

Crude oil futures reached US$139.12 a barrel in New York on June 6, the highest since trading began in 1983.

"Oil is making central bankers uncomfortable," according to Franck Dixmier, deputy chief executive officer at Paris-based Allianz Global Investors. "It's generating an inflation shock," he said.