European shares snapped a six-day winning streak yesterday, hit by weak US employment data and commodity stocks suffering from lower crude and metal prices.
The pan-European FTSEurofirst 300 index of top European shares closed 1.3 per cent down at 877.85 points after falling as low as 871.92.
David Buik, partner at BGC Partners, said markets had been too frothy in recent days "and have been ahead of themselves".
He added that the suicide of German tycoon Adolf Merckle lent weight to perceptions about the depth of the credit crisis and the damage it has done to the Germany economy.
"Most important has been the dreadful US. ADP employment data and the fall in US mortgage applications. This has been a wake-up call for the European markets. Sentiment has changed and profit takers have come in," Mr Buik added.
US private employers shed 693,000 jobs in December, up sharply from the revised 476,000 jobs lost in November and far more than economists estimated, a report by a private employment service said.
"The economy continues to deteriorate at a rapid rate and there is no end in sight. We don't see any bottom with any of the indicators," said Robert MacIntosh, chief economist at Eaton Vance Corp.
The US Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell to its lowest reading since December 2000.
Energy stocks were the biggest losers as crude fell back 6.7 per cent. Oil major BP lost 5.55 per cent, dogged by rumours it had told analysts earning would be lower than expected. BP denied the rumours.
BG Group, Royal Dutch Shell and Total were down between 3.7-4.7 per cent.
Miners retreated along with metal prices. Copper lost 3.2 per cent and US gold futures dropped over three per cent as news of a worsening global job market hurt bullion's appeal as a hedge against inflation.
Anglo American, BHP Billiton, Eurasian Natural Resources and Rio Tinto were down 4.4 to six per cent.
In the gas, water and utility sector, Scottish & Southern was down 8.2 per cent after the group said it had raised £479 million from a share placing to help fund acquisitions and investments.
Germany's largest utility E.ON and its peer RWE fell back 3.4 per cent and 2.1 per cent respectively on concerns lower oil prices will hit the companies' profits.
Traders said stocks have also been pressured by news that Russian gas flows to Europe through Ukraine have been shut down completely, reducing power to industries and homes in south-east Europe and disrupting supplies to major economies.
Among financials, Royal Bank of Scotland and UBS were down 3.9 per cent and 1.5 per cent respectively. The groups confirmed they had some exposure to chemicals company LyondellBasell, whose US unit filed for bankruptcy.
Commerzbank lost 4.8 per cent as JP Morgan resumed coverage on the group with an "underweight" rating and UBS cut its price target to €7 from €9.5.