European stocks sank yesterday as a sales warning from Philips Electronics and gloomy economic news reminded investors that profits would be slow to recover.
Worries an attack on Iraq could hike energy prices and hurt the global economy further added pressure.
"The concern has shifted away from share valuations after the big falls in equities over the summer, and it's now back on growth which looks as if it has stalled," said Matthew Wickens, an economist at ABN AMRO.
By 1535 GMT with only Frankfurt still officially trading, the FTSE Eurotop 300 index of pan-European blue chips slumped 3.5 per cent to 924 points after closing at a two-week high on Wednesday.
The retreat was broad, with declining issues outweighing advancers by 14-to-one, leaving the benchmark just 12 per cent above the five-year low hit late July.
The spectre of war also unnerved investors after US President George W. Bush warned that "action will be unavoidable" against Iraq unless the United Nations took a hard line forcing Baghdad to disarm.
"With Iraq you get the rumour mill going round, such as what's going to happen to oil fields or the oil price. No one really knows, so people tend to do nothing," Wickens said.
Among the top decliners, Vodafone dropped six per cent on asset writedown fears at the mobile phone operator, and house broker UBS cut its rating on the stock to a cautious "hold".
France Telecom fell as the market awaited the outcome of a key board meeting weighing a plan to raise up to e15 billion.
BAE Systems, the British aerospace group, slumped 14 per cent after profits disappointed.
Meanwhile Federal Reserve Chairman Alan Greenspan failed to stem worries about the US economy, saying that depressing effects still lingered. US jobless claims rose unexpectedly to their highest level in more than four months.
The European Central Bank also pushed out eurozone recovery hopes to 2003, dashing expectations of a profit revival sooner.
"It's the most unpredictable environment for earnings in sixty years," Richard Bernstein, chief US strategist at Merrill Lynch told a seminar in London.
Investors were braced for more key US economic numbers with retail sales, producer prices and the University of Michigan consumer sentiment index.
The DJ Euro Stoxx 50 index of eurozone blue chips sank 4.6 per cent to 2,597 points.
On Wall Street, the Dow Jones industrial average was off 1.5 per cent at 8,448 points, with the tech-heavy Nasdaq Composite down 1.7 per cent.