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European rally takes a breather

European stocks dipped in early trade on Monday as investors took a breather following a sharp two-week rally and a key index hit a strong resistance level, although the retreat could be short-lived as recent central bank moves boost risk appetite.

The FTSEurofirst 300 index was down 0.4 per cent at 1,116.09 points, slipping from a 14-month high hit on Friday, while the euro zone's blue chip Euro STOXX 50 index fell 0.6 per cent to 2,580.64 points, after running into strong resistance just below 2,611 points on Friday, a peak hit in mid-March.

"There is still good upside potential for stocks as we are re-pricing the 'non-break up' of the euro zone. We've just started to realise all the downside that came from the debt crisis," Louis Capital Markets trader Jerome Troin-Lajous said.

"Now, the main signal we need that would fuel this rally won't be coming from the economic outlook, it will come from the investment flows. A lot of foreign investors have been strongly 'underweight' European stocks and should start to switch out of bonds and out of U.S. equities and into European stocks."

The euro zone bank index - up 50 per cent since ECB head Mario Draghi said in late July that the central bank was ready to take all necessary measures to preserve the euro - was down 1.4 per cent on Monday, with UniCredit down 2.7 per cent and Commerzbank down 1.8 per cent.