July 12 (Bloomberg) -- European stocks declined, led by Infineon Technologies AG and STMicroelectronics NV, as Merrill Lynch & Co. advised investors to sell semiconductor shares on concern earnings growth in the industry will slow.

DaimlerChrysler AG fell after the carmaker's works council said it scheduled strikes at German plants Thursday.

Technology shares dropped the most of any group in the Dow Jones Stoxx 600 Index in the second quarter amid concern rising interest rates will slow economic growth and stem demand for products such as semiconductors. Merrill cut its rating on the chip industry to ``underweight'' from ``overweight'' on concern orders may slow as customers fail to increase inventories.

``There's no guarantee that demand for chips will pick up in the second half of the year,'' said Emma Parkinson, who helps manage $800 million of technology stocks at Polar Capital in London. Polar owns fewer chip-related shares than benchmarks suggest because they're not ``dirt cheap,'' she said.

The Stoxx 600 shed 0.4 percent to 236.32, with the measure for technology shares leading the drop. The Stoxx 50 and the Euro Stoxx 50, a benchmark for the 12 countries sharing the euro, both dropped 0.6 percent.

Benchmark indexes slid in 12 of the 17 Western European markets. Germany's DAX Index and the U.K.'s FTSE 100 Index fell 0.8 percent. France's CAC 40 Index slipped 0.5 percent. September futures on the Euro Stoxx 50 slipped 0.4 percent to 2767 as of 5:45 p.m. in London.

The Bloomberg Europe Semiconductors Index dropped 2.6 percent to 175.77, on pace to close at its lowest in eight weeks.

Infineon

``We think semiconductor equities offer no upside from current levels,'' Merrill Lynch said in a note to clients. ``Stock prices have declined, but we believe they have the potential to decline further.'' The brokerage also lowered chip- equipment makers to ``neutral'' from ``overweight.''

Infineon, Europe's No. 2 chipmaker, dropped 2.8 percent to 9.85 euros. STMicroelectronics, the region's largest chipmaker, declined 2.1 percent to 16.74 euros. ASML Holding NV, Europe's biggest maker of semiconductor equipment, slipped 4.1 percent to 12.82 euros.

Royal Philips Electronics NV, Europe's third-largest semiconductor company, slipped 0.8 percent to 21.06 euros. The Amsterdam-based company is expected to report earnings tomorrow, on the same day as the world's biggest chipmaker, Intel Corp., may announce results. ASML is scheduled to release profit figures on Wednesday.

Carmakers

DaimlerChrysler, the world's fifth-largest carmaker, shed 1 percent to 36.17 euros. Erich Klemm, head of DaimlerChrysler's works council, said the company's plan to to cut holidays and work breaks are ``not acceptable.'' Klemm said negotiations will continue tomorrow. For Thursday, the works council has scheduled protests at DaimlerChrysler's German plants that may lead to production stoppages.

The Financial Times Deutschland reported earlier the company will be the target of worker protests at all German plants Thursday following a walkout Saturday over cost cuts, citing the works council.

Volkswagen AG, Europe's biggest carmaker, also expects a dispute in pay talks as automakers cut prices, the newspaper said. Volkswagen declined 1.2 percent to 32.82 euros.

Porsche AG, the maker of the 911-model sports car, fell 3.7 percent to 520.16 euros after Barron's said sales of the Cayenne sport-utility vehicle might slow after compensating for two years of sales declines by two of the company's other models.

Glaxo

GlaxoSmithKline Plc, the world's No. 2 drugmaker, slid 1.9 percent to 1,071 pence, the biggest drop in the Stoxx 50. Citigroup Inc. trimmed its share-price forecast 8.9 percent to 1,125 pence, citing concern that new U.S. rules may delay development of new treatments for diabetes and cholesterol.

U.S. Food and Drug Administration ``guideline changes requiring more toxicity testing may delay development'' of three of Glaxo's experimental products by up to two years, the analysts said in a note to investors. All three products are potential $1 billion sellers, they said.

Schwarz Pharma AG, Germany's fifth-largest publicly traded drugmaker, dropped 2.1 percent to 27.30 euros after Frank Von Collani, an analyst at Berenberg Bank, cut the company's rating to ``hold'' from ``buy.''

International Power Plc, a U.K.-based electricity producer in countries such as Turkey, Australia and Pakistan, advanced 4 pence, or 3 percent, to 139.5 pence, after Merrill Lynch raised its recommendation of the shares to ``buy'' from ``neutral'' on prospects for improved profitability in the U.S. The brokerage boosted its share-price forecast 14 percent to 165 pence.

ASML Holding NV (ASML NA)
DaimlerChrysler AG (DCX GY)
GlaxoSmithKline Plc (GSK LN)
Infineon Technologies AG (IFX GY)
International Power Plc (IPR LN)
Porsche AG (POR3 GY)
Royal Philips Electronics NV (PHIA NA)
Schwarz Pharma AG (SRZ GY)
STMicroelectronics NV (STM FP)
Volkswagen AG (VOW GY)

To contact the reporter on this story: Kotaro Miyata in London at kmiyata2@bloomberg.net.

Last Updated: July 12, 2004 12:03 EDT