European stock markets closed sharply lower yesterday in a global sell-off driven by concerns over a growing nuclear crisis in Japan following last week’s massive earthquake and tsunami.

Dealers said developments in Japan, where there have been significant radiation leaks at the damaged Fukushima nuclear power plant, have raised serious questions about the global economic outlook.

Any damage to the world’s third largest economy is serious but the markets are uncertain about how long lasting will it be and whether Japan’s huge reconstruction effort expected later in the year will spark a revival.

Sentiment was already under pressure from violence in Libya and unrest in the wider Middle East and as this rumbles on, the outlook become even more uncertain.

“Friday’s earthquake in Japan has created additional uncertainty for financial markets already confronted by geopolitical tensions in the Middle East and North Africa,” said SEB currency strategist Richard Falkenhall.

“Global risk appetite has taken a further substantial hit from the nuclear reactor developments in Japan – most likely we will continue to see risk aversion as the dominant theme in the short-term,” Falkenhall said.

In London, the London’s FTSE 100 index of leading shares fell 1.38 per cent to 5,695.28 points but was off early lows when it lost some three percent.

In Paris, the CAC 40 dropped 2.51 per cent to 3,780.85 points and in Frankfurt the DAX slumped 3.19 per cent to 6,647.66 points.

Other markets saw substantial losses too – Amsterdam fell 2.31 per cent, Brussels shed 3.05 per cent, Madrid was down 0.83 per cent, having dropped more than three percent at one stage, Milan lost 2.01 per cent and Swiss stocks were off 2.76 per cent.

In New York, it was a similar picture, with sharp early losses of more than two per cent easing slightly by midday.

The blue-chip Dow Jones Industrial Average was down 1.67 per cent and the high-tech Nasdaq Composite fell 1.70 per cent at around 1715 GMT.

“The global equity markets are posting solid losses following reports of rising nuclear radiation levels in Japan after more explosions hit an already damaged nuclear power facility,” Charles Schwab analysts wrote .

The stage was set for a bad European day after Tokyo slumped more than 10 per cent in the biggest one-day fall since late 2008 as the news from Fukushima got steadily worse.

“Japan is being brought to its knees after the Nikkei plummeted ... and the follow through to Europe is dragging stocks even lower as the prospect of a serious environmental catastrophe is being considered,” said Simon Denham, head of trading group Capital Spreads.