The euro's gallop to record highs chilled chemical and auto stocks by midday yesterday, sending European shares sliding as investors expect the rampant single currency to dent export earnings and economic growth.
Bancassurer Fortis tumbled after unveiling large stock-related losses, while retailer Ahold sank amid worry that an accounting scandal is spreading out of control.
On a steadier note, Telecom Italia rose 0.89 per cent to 7.69 euros after parent Olivetti said it would buy back some ordinary shares in the telecoms operator at 8.01 euros as part of their plan to merge.
Dealers were in no doubt it was the dollar's slide against the euro that was rattling investors, and are looking to next week's European Central Bank meeting for relief in the form of lower borrowing costs.
"It's the US dollar weakness," said Peter Luedke, a dealer at Merck Finck, a private bank in Munich, adding that stocks were still headed lower.
"There is nothing to go on in this market, apart from another interest rate cut," Luedke said.
He expects the ECB to cut rates by 50 basis points on June 5 to help take the sting out of the euro's climb and help revive flagging economic growth.
By 1037 GMT, the FTSE Eurotop 300 index was 1.3 per cent weaker at 788 points as the pan-European benchmark remained trapped in its trading range after gaining about 20 per cent since its mid-March six-year lows.
The DJ Euro Stoxx 50 index of euro-zone blue chips sank 1.7 per cent to 2,203 points.
US stock index futures were down about 0.4 per cent, indicating that a weaker opening is likely on Wall Street when it reopens after Monday's public holiday.
US data on consumer confidence in May is due at 1400 GMT and is forecast by economists to show a gain.
Merrill Lynch investment bank said it expects the euro to rise to $1.33 next year, hurting the economy and corporate bottom lines. It hit a record high of over $1.19 yesterday.
"The macro implication is simple. Euro zone growth will be chopped and dished out to the US and UK. Europe's earnings-per-share growth is more likely to be flat than up 10 per cent in 2003 as consensus believes," the bank said in a research note.
HSBC bank said it has cut its European corporate earnings growth forecast for 2003 from four per cent to two per cent, with the cut partly limited by expectations of a steadier dollar against the Swiss franc, British pound and Swedish crown.
The euro's strength will also cause the bank to cut its economic growth numbers for Europe by 0.2 to 0.3 per cent for 2004, HSBC said.
A stronger euro makes euro zone products more expensive outside the single currency area.
Among the exporters, German chemical and drug firm Bayer shed 3.6 per cent to 16 euros, while domestic chemical rival BASF fell one per cent to 33.73 euros.
In autos, Volkswagen dropped four per cent to 28.65 euros, while DaimlerChrysler was 2.3 per cent lower at 25.04 euros.
Vodafone, the world's largest mobile phone group by revenue, reported a forecast-beating 26 per cent rise in annual core earnings and targeted 10 per cent revenue growth this year.
Dealers said much of the growth in Vodafone's earnings stemmed from non-core fixed-line assets that the company aims to sell eventually. The stock was down three per cent at 121.5 pence.
Meanwhile, Fortis disappointed investors with a 1.2 billion euro loss on its equity investment portfolio that slammed it to a 453 million euro net loss in the first quarter.
The group also refrained from giving guidance on the rest of the year. Its shares dropped three per cent to 14.13 euros.
Ahold fell four per cent to 6.10 euros after Monday's fresh revelations of accounting irregularities, this time at its Tops Markets US retail unit, which interim finance minister Dudley Eustace described as "fraud".
The group is still struggling to recover from its $880 million profit overstatement bombshell earlier this year.