Fresh worries about the outlook for the US economy after a dismal reading of service sector activity stripped more than three per cent off European shares yesterday as financials and auto stocks led the decline.
The FTSEurofirst 300 index ended the day down 3.2 per cent at 1,313.45 points. Declining issues outnumbered advancers by about 34 to one and every one of Western Europe's 16 major national indexes was deep in the red.
"It (data) is not pointing in the right direction and the markets are saying so. I think that coming on top of the non-farm payrolls we had... if there was a prospect that the (US) economy was tipping towards recession, that prospect has increased," said Brewin Dolphin chief strategist Mike Lenhoff.
Banks were the worst performers, as fears of a US recession combined with a series of broker downgrades dragged down the entire sector.
HSBC lost 2.6 per cent, while RBS lost nearly six per cent and BNP Paribas shed 5.1 per cent.
Among auto stocks, Renault fell 6.9 per cent, Fiat lost 6.6 per cent and BMW shed 5.7 per cent.
Around Europe, London's FTSE 100 index fell 2.8 per cent, while Frankfurt's DAX lost 3.5 per cent and Paris's CAC 40 shed almost four per cent.
However, the overall fall was cushioned by rising energy shares, led by BP as news of a more generous dividend policy by the oil firm eclipsed weak quarterly results.
BP gained 2.6 per cent, Total rose 1.3 percent and Royal Dutch Shell added 1.9 per cent.
In the mining sector, Anglo American fell 2.3 per cent, Rio Tinto shed 1.8 per cent, and Xstrata lost 1.4 per cent.
The DJ Stoxx basic resources index has lost 3.4 per cent since the start of the year, the best relative performance among European sectors.
Shanghai copper prices were up in anticipation of healthy demand after the Chinese New Year holidays, while zinc and aluminium dropped as investors took profit following recent gains.
Gold prices were also on the downside in London, falling more than one per cent on profit-taking after hitting a record high on Friday.
Among the banks, UBS dropped 2.3 per cent and Credit Suisse lost 2.4 per cent. Both Citigroup and JP Morgan cut their share price targets on the two Swiss banks.
"The sharp swings on shares of financial institutions is a sign that uncertainty is still really high. People use every bit of news to buy or sell. But the subprime crisis is far from over and I don't see how the market could rally," Jean-Francois Virolle, chief strategist at Global Equities, in Paris.
"People are waiting to see what the Bank of England and the European Central Bank will do and say later this week."
Interest rate decisions by both central banks are expected tomorrow.
The drop in the European banking sector followed a similar decline among US banks on Monday, falling after brokerage downgrades on signs consumers are falling behind on debt payments.
Adding to the gloom on Wall Street, data showed new orders at US factories rose at a slower-than-expected 2.3 per cent rate last month. After stripping out the transportation sector, the gain was a modest 0.7 per cent, fuelling worries over the prospect of a US recession.
Weak data also dampened the mood in Europe yesterday. Eurozone services sector growth slowed much more than expected to a four-and-a-half year low in January although growth in prices charged barely slipped, a key survey showed yesterday.
Spain's service sector shrank at its sharpest ever rate as evidence grew that the economy is slowing more than anticipated.
"The sky is tumbling in on the Spanish services sector," Bear Stearns analysts wrote in a note.
"If the ECB are listening to problems in Southern Europe they should be racing to the tape to cut rates. With Italy heading for recession this year, Spain's economy in trouble and growth prospects slowing sharply in Portugal, the ECB should be tipping the policy pendulum to easier rates a lot sooner than expected," they wrote.
Corporate Express jumped 27 per cent after Dutch newspaper Telegraaf reported that the Dutch office goods supplier was in early talks to be bought by US rival Staples.
Heidelberg tumbled nine per cent after the world's biggest maker of printing machines lowered its outlook and reported lower-than-expected third-quarter earnings.