European equities have suffered their biggest daily fall in two and a half years as a slew of downbeat US data cast further doubt on the strength of the recovery in the world's biggest economy.
German shares fell 5.8 per cent, underperfoming the wider market, with traders citing the effects of a short-selling ban on financial stocks in other parts of Europe and of intensifying worries about politicians' lack of a plan to address the euro zone sovereign debt crisis.
The European banking sector , exposed to the debt crisis, fell 6.7 per cent and is down 29.8 per cent this year. Heavyweight fallers included Barclays and Societe Generale , down 11.5 and 12.3 per cent respectively. Germany's Commerzbank fell 10.5 per cent.
Traders also cited worries about some banks' funding.
The FTSEurofirst 300 index of top European shares fell 4.8 per cent to 925.19 points, the biggest fall since March 2009. Trading volume was more than 24 per cent higher than the index's average for the last 90 days.
The index is down more than 22 per cent from a mid-February peak.
Factory activity in the US Mid-Atlantic region, as measured by the Philadelphia Fed Index, plummeted in August, falling to the lowest level since March 2009, while existing home sales unexpectedly dropped in July, tempering hopes for a revival of economic recovery.
The number of Americans claiming new jobless benefits rose last week as well, and consumer prices increased at the fastest pace in four months in July.
"The market is beginning to price in a recession. The Philadelphia Fed number was an absolute abomination," Michael Hewson, market analyst at CMC Markets, said.
"And until we get some clear idea of how policymakers are going to deal with euro zone sovereign debt problems, it's not going to get any better."
Gold rallied to its second record high in a week. Spot gold hit a record $1,817.90, as investors sought safe havens.
However, base metals fell as the outlook for demand weakened in line with economic data. The Stoxx Europe 600 Basic Resources Index fell 6.9 per cent.
"It's a bloodbath," said Erik Esselink, fund manager at Invesco Perpetual, which has €5bn under management.
"From a longer-term view, the comments from the politicians (French president Nicolas Sarkozy and German chancellor Angela Merkel) were quite helpful, but from a short-term view there was nothing you could you could hang your hat on."
City A.M. Reporter