European equities suffered their biggest daily fall in two and a half years on Thursday, 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 percent, 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 eurozone sovereign debt crisis.
The European banking sector, exposed to the debt crisis, fell 6.7 percent and is down 29.8 percent this year. Heavyweight fallers included Barclays and Societe Generale, down 11.5 and 12.3 percent respectively. Germany's Commerzbank fell 10.5 percent. Traders also cited worries about some banks' funding.
The FTSEurofirst 300 index of top European shares fell 4.8 percent to 925.19 points, the biggest fall since March 2009. Trading volume was more than 24 percent higher than the index's average for the last 90 days. The index is down more than 22 percent 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. Auto shares, down 7.4 percent, featured among the worst performers on worries a slowdown in the global economy would dent vehicle demand. Fiat fell 11.9 percent, following disappointing sales news from one of its key markets, Brazil. Germany's MAN and BMW fell 10 and 7.9 percent respectively.
"It's a bloodbath," said Erik Esselink, fund manager at Invesco Perpetual, which has 5 billion euros 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."
France's market regulator AMF on Thursday modified its ban on short selling of financial stocks and related derivatives to let investors maintain existing short positions by buying new options to replace expiring ones.
Germany's blue chip index fell more than others on worries that a short-selling ban on financial shares and related financial instruments in France, Italy, Spain and Belgium announced last week had pushed investors towards futures and options on the DAX, excluded from the short-selling ban.
Traders also cited news that Austria was joining Finland in asking Greece for collateral in exchange for emergency loans. A Morgan Stanley note saying the United States and the eurozone are "dangerously close to recession" added to the gloomy outlook for shares.
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