European stock markets fell back yesterday and shares in Madrid plunged as investors kept a watchful eye on Spain and Italy after sharp gains the previous day.

At the close, London’s benchmark FTSE 100 index was down 0.38 per cent at 5,745.29 points, Frankfurt’s DAX 30 slumped 1.01 per cent to 6,732.03 points and in Paris the CAC 40 tumbled 1.59 per cent to 3,240.29 points.

Madrid’s benchmark IBEX 35 lost a sharp 3.99 per cent after figures showed an spike in bad loans at Spanish banks and Milan’s FTSE Mib index sank 1.71 per cent after the government downgraded its growth forecasts, putting off the 2013 target for a balanced budget.

In foreign exchange trade, the euro dropped to $1.3111 from $1.3125 in New York late Tuesday and the dollar rose to 81.26 yen from 80.88 yen. In the US, investors put aside some solid earnings and sold down US stocks.

The Dow Jones Industrial Average was down 0.44 per cent, the broader S&P 500 lost 0.26 per cent while the Nasdaq fell up 0.47 per cent at around 1600 GMT.

European stocks soared on Tuesday after a successful Spanish bond auction eased concerns over the eurozone debt crisis, with further support coming from an upbeat IMF outlook on the world economy.

However, markets retreated yesterday after Italy slashed its 2012 economic growth outlook to minus 1.2 per cent from minus 0.4 per cent and said it will miss a 2013 target for a balanced budget as officials struggle to revive the economy. Prime Minister Mario Monti had vowed to uphold the previous government’s pledge to balance its budget in 2013 and the technocrat government has now raised the 2013 deficit target from 0.1 per cent of Gross Domestic Product to 0.5 per cent.

The news did little to assuage investor worries that Italy and Spain could fall victim to the long-running eurozone sovereign debt crisis, dealers said. From beginning of session, “the banking sector was under pressure the day before a crucial debt auction for Spain,” Guillaume Garabedian, anlayst with Meeschaert Gestion Privee said.

Sentiment on lenders took a blow from official data showing that Spanish bank’s bad loans hit an 18-year high in February.

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