European stocks reel as economic doubts resurface

European shares experienced their biggest one-day percentage fall in nearly four years, yesterday, as fresh US economic worries, a plunge in Chinese stocks and geopolitical uncertainties fuelled an equity sell-off.

Mining and energy shares led the market rout, with economically sensitive sectors such as construction and building materials also hit amid renewed concern about slower economic growth in the United States and China.

The FTSEurofirst 300 index of leading European shares closed 2.86 per cent lower at 1,506.05 points, its lowest level since January 11 and erasing nearly two thirds of its gains since the start of the year.

European stock markets took a turn for the worse shortly after the publication of an economic report showing that new orders for US-made durable goods had fallen by a much sharper-than-expected 7.8 per cent last month.

"The durable goods release likely brought the bears on the US economy out of hibernation," said analyst Patrick Franke at Commerzbank. "Although durable orders are a very volatile series, the data point to an ongoing weakness in investment demand.

"Even if there is a rebound in February (this month), which is very likely, investment spending will probably not gather much momentum in the first quarter. The drop in real investment in the fourth quarter thus does not appear to have been a one-off, but now looks like the harbinger of a more enduring weakness."

The numbers added to remarks by former US central bank chairman Alan Greenspan about the possibility of a US recession towards the end of this year, unnerving investors.

Sentiment was also hurt by an 8.8-per cent slide in China's benchmark Shanghai Composite Index - its biggest daily percentage fall since 1997 - amid fears that authorities would crack down on the speculation that drove shares to record highs.

Traders said the slide did not appear to be triggered by concrete news, but the tumble came a day after the main index jumped to an all-time high, bringing its gains for this year to 14 per cent. The market soared 130 per cent last year, making it the world's best-performing major market.

Resurging worries that slower growth in the red-hot Chinese economy could cap demand for basic materials such as oil and metals prompted investors to lock in their profits on energy and mining stocks. Total shed 2.3 per cent, while BHP Billiton plunged six per cent.

"Investors are uncertain and afraid that a bubble could burst in China," said a German trader.

Heightened risk aversion sparked by mounting geopolitical tension surrounding Iran's nuclear programme also hit equities.

The FTSE 100 fell 2.3 per cent, the CAC 40 and the DAX both shed three per cent, the SMI dipped 3.4 per cent in Zurich, while Madrid's IBEX closed down three per cent, its biggest one-day percentage drop since March 2004.