The euro hit a four-month low, shares fell and safe-haven German government bonds climbed to their highest in three weeks on Wednesday, as poor data added to euro zone worries following its controversial bailout of Cyprus.
Cyprus is expected to complete capital control measures on Wednesday to prevent a run on banks by depositors after the country agreed a bailout deal that will wipe out some senior bank bondholders and impose losses on large depositors.
The worry among investors and economists is that despite attempts by some officials to dismiss the idea, the plan could become a blueprint for any future euro zone bailout.
The concerns, which come as failing growth and political uncertainty increase pressure on the region's strained members, pulled the euro to a four-month low of $1.27930 and pushed up the dollar .DXY.
"After the deal for Cyprus there is concern about what would happen if another country were to ask for financial help," said Niels Christensen, currency strategist at Nordea.
"It is difficult to point at positive factors for the euro ... We need good economic data from the euro zone to support the euro going forwards, and people fear that this is not very likely."
The first fall in euro zone economic confidence after four months of gains added to the downbeat mood. If struggling countries cannot sustain healthy growth rates in the coming years there will be little chance of them cutting their debts.
German government Bund futures, an asset that investors value in times of increased tension, rose 50 ticks to their highest since March 4.
Italy, the first of the euro zone's big debt-laden Mediterranean members to test the bond market since the Cyprus deal, cleared a 7 billion euro sale of five- and 10-year bonds, with yields on the shorter dated instrument rising, but falling for the longer.
In an interview with Reuters, rating agency Moody's warned the euro zone's problems and the political stalemate in Rome were providing a headwind to the growth Italy needs to keep its debts manageable.
The comments came as Italian industrial orders fell for a third straight month in January and retail sales added a seventh month of declines.
U.S. data published on Tuesday, which signaled the world's largest economy remains in recovery mode, had helped European stock markets early in the day, but euro zone worries quickly sent them into reverse.
Separate reports showed that demand for durable U.S. manufactured goods surged in February, while U.S. single-family home prices started the year with the biggest annual increase since June 2006.
By mid-morning the FTSEurofirst 300 .FTEU3 was down 0.6 percent, with Paris's CAC-40 .FCHI, Frankfurt's DAX .GDAXI and Madrid's IBEX .IBEX down between 1 and 2 percent.
Adding to the gloom, Spain revised up its 2012 budget deficit to almost 7 percent.
The U.S. data had slightly lifted Asian shares, but the falls in Europe left MSCI's index of world shares, which tracks 6000 stocks in 45 countries, down 0.2 percent. U.S. stock futures also point to lower start for Wall Street. .N
In commodity markets, oil slipped back towards $109 a barrel, having broken that level with the help of the promising U.S. data, and copper dipped to $7,609 a metric ton (1.1023 tons). Gold, which has rallied during the Cyprus turmoil, was on course for its fourth session of losses.
"Although markets are still grappling with the slowing European growth momentum, U.S. domestic drivers of growth appear solid, with housing data overnight largely in line with expectations and durable goods orders slightly better than expectations," analysts at ANZ said in a note.
(Addition reporting by Tricia Wright and Jessica Jaganathan in Singapore; Editing by Will Waterman)