European shares were set to post their weakest close since September's post-attacks low in late trade yesterday, hit by mounting debt concerns at Vodafone, Alcatel, and leaderless media giant Vivendi Universal.
A broad gloom hung over the market, with fallers outnumbering climbers by more than nine-to-one, as investors mulled the possibility of further accounting scandals, amid scant evidence of a recovery-fuelled pickup in profits.
However, bullish strategists were not quite ready to run up the white flag, and pinned their hopes on the half-year reporting season due to begin later this month.
"European equities are 30 per cent below fair value and we think earnings are likely to be the catalyst to lift markets in the second half of this year," said Ben Funnell, a European equities strategist at Morgan Stanley.
Some fund managers, though, saw company earnings having a limited impact in the short-term, in the wake of US telecom giant WorldCom's shock recent disclosure of huge accounting discrepancies.
"There's a credibility gap between what investors believe earnings are and what they might be," said Des Flood, a European fund manager at Hibernian Investment Managers, which has about seven billion euros under management in Dublin.
At 1558 GMT, the FTSE Eurotop 300 index of pan-European blue chips was 2.85 per cent lower, while the broader DJ Stoxx 600 index shed 2.83 per cent.
Both indices are down 19 per cent so far this year, during which time Europe's biggest 600 companies have lost about one trillion euros of their market value, according to Bank of America. The large cap DJ Euro Stoxx 50 index was 2.23 per cent weaker.
On Wall Street, the Dow Jones Industrial Average index was down 0.5 per cent while the tech-heavy Nasdaq Composite was 0.27 per cent weaker.
French telecom gear maker Alcatel fell 16 per cent and British mobile phone operator Vodafone dropped 6.4 per cent on fears possible credit rating cuts will make mounting debt more expensive to service.
Alcatel's announcement that it is in a position to satisfy all of its financial obligations and that it expects a positive full-year operating cash flow, failed to quash investors' fears.
Major client France Telecom, though, managed to eke out a 1.9 per cent gain ahead of its extraordinary board meeting to try and resolve a dispute with its estranged German affiliate MobilCom.
Franco-American Vivendi Universal, meanwhile, took another massive hit, tumbling 22 per cent on lingering liquidity fears as its directors prepared to appoint a new chief with a possible mandate to break up the world's second biggest media group.
News Corp put the squeeze on Vivendi's efforts to trim its long-term debt by cutting the 1.5 billion euros it had previously offered for its Italian pay-tv unit Telepiu.
Vivendi shares crashed 40 per cent on Tuesday.
However, firmer Swiss insurers gave struggling markets a little ballast.
Swiss Life shone amidst the gloom, jumping almost 14 per cent after the Swiss government laid out plans to cut the minimum required yield on pension plans.
The Swiss group had complained bitterly the minimum rule was a severe handicap to its Swiss professional pension activities.
Local rival Baloise added 2.9 per cent. But elsewhere in the region, insurance companies continued to suffer on fears that weak stock markets will erode their assets to such an extent they won't be able to cover their liabilities, and will need fresh cash.
British groups Prudential and Aviva (formerly CGNU) stood out among the fallers, shedding 5.9 per cent and 10.4 per cent respectively after JP Morgan cut some of its targets.
Chip stocks such as Germany's Infineon and Franco-Italian STMicroelectronics dropped after US semiconductor group Advanced Micro Devices cut its quarterly sales forecast.
UK airline British Airways dropped 5.2 per cent after saying June passenger traffic fell by 13.1 per cent and that the overall market outlook remains soft.