European shares fell sharply yesterday, led by banks and energy shares, as the prospect of economic slowdown loomed large in investors' minds, even after another round of central bank interest rate cuts.
The European Central Bank, which cut rates by half a point as expected, and the Bank of England, which shocked markets with the largest official rate cut since 1981, did little to support equities, where investors are now looking beyond the turmoil of the financial crisis to the damage to the economy.
Heavyweight stocks from a variety of sectors hit the index, including HSBC, which lost 4.1 per cent, Vodafone, which dropped 7.8 per cent, BP, which fell nearly six per cent and EDF, which shed 6.3 per cent.
The FTSEurofirst 300 index of top European shares ended down 5.78 per cent at 898.13 points.
"We did rally 20 per cent in both Europe and the UK and we did that in under two weeks, what that rally was about was the story about the worst of the financial crisis being behind us," said Dresdner Kleinwort strategist Philip Isherwood.
"Now that is perfectly legitimate... while that 20 per cent rally was recognising the worst of the financial crisis was over, the same cannot be said for the economy," he said.
Banks were again the worst performers, as the potential lift for the sector from more rate cuts was quashed by the growing concern over the depth and duration of any economic slowdown.
HSBC was the largest negative drag on the overall market, followed by UBS, which fell by nearly eight per cent, Banco Santander , which shed six per cent and BNP Paribas and Credit Suisse, which lost between seven and 7.6 per cent.
Elsewhere in financials, the world's biggest listed hedge fund firm Man Group tumbled 31.2 per cent on fears its clients would liquidate yet more funds, while AXA, Europe's biggest insurer by market capitalisation, fell 9.2 per cent after reporting lower nine-month sales.
Revenue was affected by outflows at its asset management division because of turbulent market conditions.
The ECB delivered a widely anticipated 50 basis point cut to euro zone rates, bringing its benchmark interest rate down to 3.25 per cent, the lowest in two years.
ECB President Jean-Claude Trichet signalled another cut was possible this year as inflation pressures ease and the euro zone faces its first recession.
Mr Trichet's suggestion that inflation could pose less of a risk did nothing to lift European stocks.
"It is clear the markets would react to a 50 basis point cut by the ECB negatively because, in the end, it was fully priced in," said FrankfurtFinanz analyst Heino Ruland.
"There were a lot of people hoping for a cut of 75 points because the economy is contracting in a way I haven't ever seen."
The Bank of England earlier cut British rates by 1.5 percentage points to three per cent, its largest cut since the 1981 slump, trumping expectations for a half-point cut in rates.
"This decision is unprecedented and the market is going to be confused for a time by it," said Jim Wood-Smith, head of research at Williams de Broe.
"On the one hand it is good news; on the other hand it is confirmation that we are up a gum tree."
Around Europe, the FTSE 100 index fell 5.7 per cent, Germany's DAX lost 6.8 per cent and France's CAC 40 fell 6.4 per cent.
Renewed concern about global economic slowdown hit US benchmark indexes, which fell between 2.7 and 3.2 per cent and hurt the macro-economically sensitive energy sector, along with a 7.2 per cent slide in oil futures.
Royal Dutch Shell and Repsol YPF both lost around seven per cent, while Total fell 5.9 per cent and StatoilHydro lost over 10 per cent.
A retreat in metal prices also weighed on mining shares with copper down 3.4 per cent.
Rio Tinto, BHP Billiton and Xstrata were all down around 14 per cent, while Vedanta Resources lost over 20 per cent after posting a 24.7 per cent drop in first half profit.
Among gainers, brewer InBev gained 0.5 per cent as it insisted its $52 billion takeover of Anheuser-Busch was on track after third-quarter results slightly exceeded expectations despite rocketing costs.