Renewed European debt fears weigh on markets

By PAN PYLAS AP Business Writer

LONDON (AP) - World stock markets fell sharply Tuesday amid renewed worries over Europe's government debt crisis and a report that the Federal Reserve may announce a limited package of stimulus measures at its next rate-setting meeting.

In Europe, the FTSE 100 index of leading British shares was down 56.36 points, or 1 percent, at 5,517.06 while Germany's DAX fell 65.68 points, or 1.1 percent, at 6,213.21. The CAC-40 in France was 38.76 points, or 1 percent, lower at 3,727.40.

Wall Street was poised for further losses at the open later - Dow futures were down 33 points, or 0.3 percent, at 10,717 while the broader Standard & Poor's 500 futures fell 3.9 points, or 0.3 percent, to 1,133.80.

The main reason behind the selling, which started on Wall Street Monday and continued through the Asian session and into Europe's open was a renewed bout of jitters over Europe's government debt crisis after Moody's Investor Services cut its rating on Anglo Irish Bank Corp. by three notches.

Unconfirmed market rumors that Moody's is also preparing a downgrade of Spain's debt was also weighing on shares.

"Sovereign debt worries are once again adding to traders' woes with the threat of a credit downgrade for Spain by Moody's," said Ben Critchley, sales trader at IG Index.

"This together with the profit taking ahead of the month and quarter end could lead to a broad-based sell-off that could leave markets in a state of limbo for some time yet," he added.

Also weakening sentiment Tuesday was a report in the Wall Street Journal saying that the Fed may not announce massive bond purchases with a finite end as it did in 2009 but instead opt for a smaller-scale program that can be adjusted as the recovery unfolds. The Fed's next meeting is in early November.

One of the reasons why stocks have been relatively buoyant of late is the expectation that the Fed would commit to another big package of measures to shock the financial system back into life - the prospect of a bigger pool of dollars in the system had been supporting shares while simultaneously hitting the dollar.

"A more flexible approach...makes a lot of sense at this point in the economic cycle and if this view is backed up by U.S. data, attention in the foreign exchange market will quickly shift back to the eurozone," said Derek Halpenny, European head of global currency research at The Bank of Tokyo-Mitsubishi UFJ.

Amid the debt worries, the euro has drifted down from Monday's fresh five month high of $1.3506 to trade at $1.3440.

The main focus in the U.S. will be the latest consumer confidence survey from the Conference Board as investors look to see if the recent talk of a double-dip recession is having a major impact on sentiment - the consensus in the markets is that confidence slipped slightly during September to 52.5 from 53.5.

The state of the U.S. consumer is important for the pace of the economic recovery as consumer spending accounts for around 70 percent of the world's largest economy.

Earlier in Asia, Japan's Nikkei 225 stock average slid 107.38 points, or 1.1 percent, to 9,495.76 with exporters hurt by the yen's sustained strength.

Investors are closely monitoring the Japanese currency, which authorities may try to weaken again soon after the Japanese central bank earlier this month bought dollars to weaken the yen for the first time in six years. The Nikkei financial daily reported that the central bank will discuss further monetary easing when it meets next week.

By mid morning London time, the dollar was unchanged on the day at 84.22 yen.

South Korea's Kospi lost 0.3 percent to 1,855.97, Hong Kong's Hang Seng retreated 1 percent to 22,109.95 and the Shanghai Composite Index fell 0.6 percent to 2,611.35.

Australia's S&P/ASX 200 benchmark reversed course to close down 0.1 percent at 4,669.80.

Benchmark crude for November delivery was down 88 cents at $75.64 a barrel in electronic trading on the New York Mercantile Exchange. The contract added 3 cents to settle at $76.52 on Monday.