LONDON: European stock markets fell sharply Monday as a Standard & Poor's downgrade on the US debt outlook spooked investors already worried by signs of fresh tensions over eurozone public finances.
The S&P downgrade on the US debt outlook to 'negative' from 'stable' set off a chain reaction across all markets -- stocks, bonds, commodities, forex -- on fears Washington might not be able to resolve its financial problems.
S&P said it did not see how the US government could reduce the massive public deficit -- estimated at $1.6 trillion this year, drawing an immediate Treasury riposte that the ratings agency underestimated what could be done.
S&P gave the United States until 2013 to come up with a credible plan for addressing its financial problems or risk loosing its coveted 'AAA' credit rating which allows it to borrow at low interest rates.
S&P's move came as Democrats and Republicans gird for a huge fight over rival plans to cut the deficit, both offering starkly different visions of how the US should fix its finances.
News of another Chinese interest rate hike over the weekend as Beijing seeks to rein in its booming economy added to the negative tone, dampening sentiment in the miners and others supplying China's key raw materials.
In London, the FTSE 100 index of leading shares closed down 2.10 percent to 5,870.08 points. In Paris, the CAC 40 lost 2.35 percent to 3,881.24 points and in Frankfurt the DAX fell 2.11 percent to 7,026.85 points.
There were similar losses for other European markets, additionally hit by concerns Greece may have to restructure its debt and as Portugal negotiated what is expected to be very tough bailout package with the EU and IMF.
New York was also down sharply as the banks took a battering, with the \blue-chip Dow Jones Industrial Average falling 1.63 percent at around 1600 GMT while the tech-heavy Nasdaq Composite was off 1.74 percent.
In London, Joshua Raymond, analyst at City Index traders, said European sovereign debt concerns caused "investors to trade cautiously and reduce holdings in riskier equity sectors such as miners and heavyweight banks.
"Sovereign debt concerns within Europe ... have taken centre stage over the last few days," Raymond said, noting how the issue could be complicated by the sharp election gains in Finland for the anti-Euro party, the True Finns.
Finland's parliament has to approve any involvement in an EU bailout package and the True Finns have made clear they flatly oppose any such payments.
Among the British banks, Barclays lost 3.63 percent and Lloyds Banking Group 2.13 percent and European lenders were also in the firing line.
In Paris, Guillaume Garabedian at Meeschaert Gestion Privee said trade was marked by a slew of bad news on the debt front.
Another analyst, who asked not to be named, said "there is a risk that American leaders cannot reach an understanding to reduce the deficit.
"The debt crisis is not only in the eurozone but in all the Western countries. Standard & Poor's are there to remind us of that and that is terrifying," the analyst said.
Dealers noted that otherwise solid US company results made little impact given the consternation caused by S&P's action.
In Asian trade earlier Monday, Tokyo slipped 0.36 percent, Hong Kong fell 0.74 percent but Shanghai gained 0.22 percent and Sydney was up 0.20 percent.