Insurers and Philips Electronics led declining European equities by mid-yesterday, bedevilled by currency worries and offsetting a rise in Vivendi Universal on fresh hopes of asset sales.
Vivendi shares jumped five per cent as comments from vice chairman Edgar Bronfman Jr that he was interested in buying back the group's US entertainment assets stoked up hopes new asset sales would help the media giant reduce debt.
Investors, grappling with deflation fears, will listen to US Federal Reserve Chairman Alan Greenspan's testimony before the Joint Economic Committee in Congress at 1330 GMT - with trade seen quiet until then.
Any comments suggesting the US central bank may cut rates for a 13th time since the start of 2001 in its campaign to prevent a further decline in the pace of inflation would further hurt the dollar and trigger more selling in euro-sensitive stocks.
"The market expects Mr Greenspan to confirm that the Fed is confident in the improvement of the economy but that uncertainties remain over the scope and timeframe of a recovery," said CIC Chief Economist Valerie Plagnol in Paris.
"And markets await first and foremost clarifications on the risk of persistent deflation the Fed talked about. Mr Greenspan said this risk could not be brushed aside and this justified the adoption of an accommodative monetary policy."
Investors want information on the possibility of a rate cut at the Fed's June 25 meeting.
By 1120 GMT, the FTSE Eurotop 300 index of pan-European blue chips was down 1.5 per cent at 793 points and the euro zone DJ Euro Stoxx 50 index skidded 1.95 per cent to 2,205 points.
US stock index futures signalled a slightly lower start on Wall Street, with investors likely to stay on the sidelines until Greenspan speaks.
Across Europe, Paris, London, Zurich and Amsterdam were all down.
Frankfurt's DAX slipped 1.9 percent after comments from the Bundesbank reminded investors that the rise of the euro was making business more difficult for German exporters.
"The strong euro should have a greater impact on Germany than on other European countries and the hit to earnings should be greatest in the second quarter," said Rolf Elgeti, Chief European strategist at Commerzbank, adding this and other risks should prevent a further rise in German equities.
Dutch insurer Aegon and German peer Allianz traded sharply down after Morgan Stanley included them in a list of European insurers whose already-fragile earnings could be hit further by the weakening dollar.
Zurich Financial Services and Britain's Prudential, also cited by the investment bank, also shed more than three percent each.
Another casualty of the strong euro was Dutch consumer electronics giant Philips Electronics, which said the declining dollar and slow world economy were putting pressure on revenues, in particular at its key consumer electronics and semiconductors units.
But Chief Executive Gerard Kleisterlee said Philips was not backing away from its goals.
The rest of the technology sector fell, weighed on by comments from Carly Fiorina, chief executive of U.S. computer titan Hewlett-Packard, that there was still no sign of a recovery in spending on information technology.
Investors shrugged off Hewlett-Packard's forecast-busting earnings to dump shares in French telecom equipment maker Alcatel, British semiconductor designer ARM Holdings and French IT consultant Cap Gemini.
But French technology consultant Altran bucked the sector trend to add 9.6 percent on the troubled group's efforts to clean up its accounts and its better-than-expected first quarter sales.
Elsewhere, French building materials firm Lafarge lost six percent after Merrill Lynch downgraded it to "neutral", citing downside risk to the shares partly due to the weaker dollar.