European shares closed almost one per cent lower yesterday after US economic data revived fears that the Federal Reserve will continue with its monetary tightening campaign next week.
A mixed batch of corporate earnings including poor trading income at Deutsche Bank also weighed, while crude prices rose one per cent as a political source said Israel had decided to step up its offensive against Hizbollah in Lebanon.
After settlement, the pan-European FTSEurofirst 300 index closed 0.9 per cent down at 1,326.70 points having been flat before the US started trading.
The benchmark is eight per cent above a seven-month intra-day low in June but still six per cent below a near five-year high in mid-May as bullish earnings reports contrast with fears of rising global borrowing costs.
Investors were also nervous ahead of an expected interest rate increase from the European Central Bank tomorrow, when traders fear the Bank of England may also surprise with a rate rise.
The Institute for Supply Management said its index of US national factory activity rose to 54.7 last month from 53.8 in June, beating economists' forecasts for a slight fall to 53.7.
"The ISM figures seem to be suggesting that the US inflation situation is now outside the Fed's comfort zone, so we're looking at more chances of a rate increase again," a London trader said.
European shares and US stock index futures had earlier ticked up after data showed that core US consumer prices rose 0.2 per cent in June as expected, but they soon fell back as investors digested the full report.
The Fed meets on August 8, and investors had thought it was poised to pause its long series of rate hikes.
"There's room for doubt (on the Fed's next move). It looks slightly more likely than before (that there will be a hike), but there's still room for debate over the next week or so," said Alex Scott, an analyst at private client money manager Seven Investment Management.
Around Europe, Germany's DAX fell 1.5 per cent, France's CAC 40 slipped 1.2 per cent and Britain's FTSE 100 lost 0.8 per cent.
The Dow Jones industrial average fell 0.7 per cent to 11,110.36, and the Nasdaq Composite dropped 1.3 per cent.
Swiss markets were closed for a national holiday, and volumes again were below average across the rest of Europe as investors headed off for August summer breaks.
Dutch telecoms operator KPN jumped nearly six per cent on forecast-beating results, but Deutsche Bank fell 4.7 per cent after unexpectedly weak earnings from trading securities, which sparked fears choppy markets could upset its results this year.
German mail and logistics group Deutsche Post fell over four per cent after the company's operating profit came in lower than analysts' average estimates.
Ryanair also lost 2.7 per cent after sticking to its full-year profit goal and warning of a tough winter despite a jump in quarterly net income.
Today's agenda is packed with earnings from more of Europe's leading companies including investment bank Credit Suisse and carmaker BMW.