By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- A raft of disappointing earnings reports from European heavyweights pushed the region's stock markets to sharp losses on Thursday, while another soft inflation reading for the euro zone offered little consolation.

Meanwhile, a "selective default" by Argentina kept investors in a downbeat mood.

Data: More or less as expected, inflation in the euro zone dropped to 0.4% in July from 0.5% in June, marking the lowest level since October 2009. The weakness is a setback to the European Central Bank, which in June launched a package of liquidity measures aimed at boosting growth and bringing inflation more in line with the bank's goal of just below 2%.

In a bit better piece of news, unemployment in the currency union fell to 11.5% in June, from 11.6% in May, reaching its lowest level since September 2012.

The number of Germans without a job fell more than expected in July, while the unemployment rate was unchanged at 6.7%.

In the U.K., a survey from British lender Nationwide showed house prices in the country in July rose at the slowest pace since April last year.

Market reaction: All major European markets were mired in the red. The Stoxx Europe 600 index lost 0.8% to 337.54, setting it on track for a 1.3% monthly drop. Such a decline would mark the biggest monthly slide since January.

Germany's DAX 30 index fell 0.9% to 9,503.40, poised for a 3.3% decline for July. France's CAC 40 index gave up 0.8%, set for a 3.2% loss for the month.

The U.K.'s FTSE 100 index slipped 0.2% to 6,761.85. For the month, the U.K. benchmark looked set to outperform the other country-specific indexes with a 0.3% advance.

The euro (EURUSD) slipped to $1.3385, from $1.3397 late Wednesday.

Comments: Howard Archer, chief U.K. and European economist at IHS Global Insight, called the weak euro-zone inflation data a "blow" for the ECB and said "it will fuel expectations that the bank will ultimately have to take further action."

James Ashley, chief European economist at RBC Capital Markets, noted that inflation has been below 1% for 10 straight months now, so it "does not pass muster to present the current weakness as being due to short-term noise."

"Rather it is the case that a bit of noise is merely amplifying the more persistent (and broadening) disinflationary problem in the euro area," he said in a note.

Banco Espírito Santo slump: The Portuguese banking sector was back among major losers in Thursday's trade, led by a 26% slump for Banco Espírito Santo SA . The slide came as the shares resumed trade in midmorning action after the bank reported a record loss for the second quarter.

Analysts at Citigroup downgraded BES to neutral/high risk, from buy/high risk, and said there are still risks that could knock the stock lower. These include a bail-in, undiscovered losses once the new restructuring plan gets under way and reputational issues.

Among other Portuguese banks, shares of Banco Comercial Português SA lost 2.7% and Banco Internacional do Funchal SA gave up 4.3%.

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