PARIS, Dec 28 (Reuters) - European stocks dipped in thin holiday trade on Wednesday, halting their year-end rally, hurt by fresh worries over the euro zone debt crisis and Iran's threat to stop the flow of oil through the Strait of Hormuz.
At 0915 GMT, the FTSEurofirst 300 index of top European shares was down 0.05 percent at 989.90 points in anaemic volumes.
The euro zone’s blue chip Euro STOXX 50 index was down 0.1 percent at 2,287.50 points, testing a key support level, its 50-day moving average.
Heavyweight mining stocks featured among the top losers, with Rio Tinto down 0.8 percent, while oil producers also lost ground, with BP down 1.2 percent and Total down 0.4 percent, hit by fears of output disruption.
Iran’s first vice-president warned that the flow of oil through the Strait of Hormuz would be stopped if foreign sanctions were imposed on Iran’s crude exports over its nuclear ambitions.
Banking stocks also retreated, with Credit Agricole down 1.9 percent and UniCredit down 0.7 percent.
Yields on Italy’s debt gained ground on Wednesday ahead of the country’s short-term debt sales and with higher-risk auctions of long-term paper due later in the week.
"Italy has been the epicentre of the debt crisis in the last part of the year. The faith of this equity rally will depend on the results of Italy’s raft of debt auctions this week and in the first quarter. All eyes are on the Italian yields," a Paris-based trader said.
The country plans to sell up to 11.5 billion euros of short term bills and zero coupon bonds on Wednesday, with demand from domestic banks expected to provide a smooth auction, albeit at a high cost.
The country will face a more difficult task of selling long-term debt on Thursday, when there will be a greater reliance on international investors to buy 8.5 billion euros of debt with maturities of up to 10 years.
Despite the recent massive liquidity injection by the European Central Bank, banks still appear to distrust each other and prefer to deposit their money at the ECB’s overnight facility than lend to each other.
Latest figures show banks deposited 452 billion euros ($591 billion) at the central bank. Emergency overnight borrowing also remained high at above 6 billion euros.
"This really highlights the reluctance banks have to lend to each other and they would rather take a small loss than go to the inter-bank market," IG Markets dealer Chris Weston said.
