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London - British property companies led a pullback in European indexes on Friday after the Bank of England (BoE) flagged concerns about loose mortgage lending and raised the prospect of a rate hike.
Violence in Iraq hit broader market sentiment and boosted oil prices, with airline stocks among the worst hit while shares in oil majors gained.
British real estate firms and housebuilders were among the biggest decliners after BoE Governor Mark Carney said mortgage lending practices were becoming looser and interest rates could rise sooner than financial markets expect.
British Land and Land Securities fell nearly 3% by 09:48, while airlines easyJet and IAG fell by more than 3% as Brent oil futures rose towards $114 a barrel.
The pan-European FTSEurofirst 300 index was down 0.2% at 1 389.48 points, while the euro zone Euro Stoxx 50 fell 0.4% to 3 270.37 points, both retreating from this week's six-year highs.
The cost of insuring against future swings in European shares, as measured by the Euro Stoxx Volatility index, rose 6.2%. It had hit a low not seen since December 2006 this week.
"I'd rather be short (European stocks) at the moment," Hobart Capital Markets pan-European broker Justin Haque said.
"The market has lived in a blissful state but we're not short of warning signs: there's a war in Iraq and Carney wants to raise rates."
US President Barack Obama threatened military strikes in Iraq against Sunni Islamist militants who have surged from the north to menace Baghdad and want to establish their own state in Iraq and Syria.
Helping limit losses on broader indexes were oil majors such as Total and BG Group, which both rose nearly 1 percent on the prospect of a windfall from higher crude prices.
"There is plenty more room to the downside," said Peregrine & Black senior trader Markus Huber, who has a short position on European indexes.
"Much depends, however, on the situation in Iraq and if the West is starting to take this seriously. So far the overall implication on the global economy is small but if this continues and worsens this could change substantially."
