By Sarah Turner

LONDON (Dow Jones)--European shares dropped sharply on Monday, with oil producers skidding after the World Bank cut its forecast for economic growth this year.

The pan-European Dow Jones Stoxx 600 index declined 2.6% to 202.77 on a day when the U.S. S&P 500 turned negative for the year. The Stoxx 600 is still in positive territory in 2009 with an advance of over 2%.

Though every sector dropped, oil producers were among the worst performers on Monday, with Total (TOT) shares down 3.3% in Paris and BP (BP) shares down 3.8% in London.

The losses came as light sweet crude prices traded below $69 a barrel on concerns about global demand.

On Monday the World Bank predicted that the global economy will shrink 2.9% this year, a deeper fall than the 1.7% contraction it predicted in March.

On a regional level, the U.K. FTSE 100 index fell 2.6% to 4,234.05, the German DAX index lost 3% to 4,693.40 and the French CAC-40 index declined 3% to 3,123.25.

"The question on most investor's lips at the moment is -- is a recent 4% decline in global equities the start of a new bear phase?" commented Ian Scott at Nomura.

He's not convinced that it is, saying "we judge the recent mini-correction in the market to be something of a pause in an otherwise upward trend."

Reasons for this view include that the setback in stock prices hasn't been repeated in other risky asset markets, that cash levels remain exaggerated and that the news on the earnings front remains encouraging, he said.

But David Jones, chief market strategist at IG Index in London, said there was a "feeling that last week marked a change in sentiment for investors" after a month of trading sideways.

Anglo American climbs

Mineral extractor Anglo American was one of only a handful of advancers, tacking on 4.6%.

Over the weekend, Xstrata outlined a plan for a 41 billion pound ($67 billion) merger of equals with Anglo American, a deal that would make the combined firm the world's number three miner behind only BHP Billiton and Vale.

Xstrata shares declined 6.7%.

Other notable movers on Monday included Irish newspaper firm, Independent News & Media, which fell 22.4% in Dublin.

The firm said that it's still talking to its banks, bondholders and shareholders about refinancing and has proposed undertaking a deeply discounted rights issue to raise capital.

Renault shares dropped 7.9%. Late Friday, Standard & Poor's downgraded the automaker's credit rating to junk on expectations weak European auto demand will continue into next year.

Shares of Deutsche Lufthansa fell 2.7% after it said that it has reached an agreement to buy U.K. airline BMI in stages. The airline also late Friday lowered its profit forecast for the year.

Earlier, Virgin Atlantic president Richard Branson said that he is interested in the carrier and would look to talk to Deutsche Lufthansa should it exercise its option to raise its stake in BMI.

Branson also reportedly said over the weekend that it wouldn't be interested in buying British Airways , even if the shares fell below 100p.

British Airways shares fell 8.7% to 125p.

Turning to the technology sector and telecom equipment maker Alcatel-Lucent (ALU) fell 8.6% to 1.77 euros.

Merrill Lynch downgraded the firm to underperform from neutral. It said that the shares are close to its 2 euro price objective which puts it in the bottom quartile of share price potential upside compared to other European technology firms.

The broker also said that a deal by Nokia Siemens Networks late Friday to buy Nortel assets is a marginal negative for Alcatel-Lucent.

"A stronger ex-Nortel business challenges Alcatel-Lucent in its most profitable region," the broker said.

Nokia Siemens Networks is 50:50 owned by Nokia (NOK), which fell 4.3%, and Siemens (SI), which fell 3.4%.

Siemens separately said that worldwide stimulus programs could net it 15 billion euros of orders.

Services Desk; Dow Jones Newswires; +44-20-7842-9319/9274