European stock markets closed sharply lower yesterday after the US Federal Reserve warned that the US recovery was stalling and that it would take fresh stimulus measures to get it back on track.

Dealers said the warning only confirmed what many had feared after recent disappointing data, especially last week’s worse-than-expected employment report, which stoked growing fears of a double-dip recession.

Many had hoped that as the economy strengthened, the Fed would be able to wind down its massive stimulus programme but on Tuesday it said it would instead keep it fully in place, leaving the way open to do more if needed.

Data earlier yesterday also showed a marked slowdown in the Chinese economy, hitting sentiment badly in Asia and compounding fears that one of the world’s growth engines might not be able to drag its peers forward.

At the same time, a Bank of England growth downgrade for the British economy added to the negative tone and offset recent strong eurozone figures.

Second quarter German growth figures due on Friday, which are expected to be very good, will be closely examined for any sign of approaching weakness.

In London, the FTSE 100 index of leading shares closed down 2.44 per cent at 5,245.21 points. In Paris, the CAC 40 tumbled 2.74 per cent to 3,628.29 points and in Frankfurt the DAX lost 2.10 per cent to 6,154.07 per cent.

“The Fed’s downbeat assessment of the economic outlook and ... (the) similar statement from the Bank of England has seen the markets adopt a ‘risk-off’ strategy and book profits from the recent highs,” CMC Markets analyst Michael Hewson said.

“Until economic data starts to improve it looks like markets could well remain under some pressure,” he added.

The Fed noted that growth in the world’s biggest economy “has slowed in recent months ... the pace of economic recovery is likely to be more modest in the near term than had been anticipated”.

Accordingly, the Fed would keep its stimulus measures unchanged, rather than let its two-trillion-dollar portfolio of bonds, mortgages and other assets mature naturally.

“The Fed has taken something of a proactive step in countering current worries over the US economic slowdown although it would be difficult to argue that the market has been entirely convinced by this approach,” said IG Index analyst Cameron Peacock.

In New York, the blue-chip Dow Jones Industrial Average slumped 2.09 per cent at around 1600 GMT while the tech-rich Nasdaq Composite was down 2.76 per cent.