Concerns over the health of the global economy dampened the appetite for riskier assets on Wednesday with data showing the euro zone may be sliding back toward recession and signs the region's crisis may be hitting China's giant economy.
Growing worries that Greece will struggle to meet the demands of its new bailout deal also added to the uncertain tone for shares and the euro, while the prospect of weaker demand in both Europe and Asia sent oil and metals markets lower.
"The (euro zone) economy remains stuck in low gear. It's indicative of a flatlining economy, maybe slightly contracting rather than a major slowdown," Peter Dixon, global equities economist at Commerzbank said.
The numbers sent the broad FTSEurofirst index of top European companies down 0.8 percent to 1,076.49 points and below a seven-month high hit at the start of the week. U.S. stock index futures pointed to a mixed opening for Wall Street.
The data also kept the euro under pressure against the dollar though, at $1.3230, it was down only about 0.3 percent on the day, and below its two-week high of $1.3293 hit on Tuesday after a second bailout deal for Greece was agreed.
The February reading on the flash euro zone Purchasing Manager's Index (PMI) of 49.4 was below forecasts and under the 50 level that signifies contraction.
The reading along with a similar index on German activity has clouded recent optimism about the resilience of Europe's economy to the region's debt crisis, although a separate survey showed France's manufacturing sector managed a marginal but unexpected return to growth in the month.
A rise in factory orders across the 17-nation euro area in December, led by a rise in new orders from Italian factories, tempered the worries, although overall industrial orders in the region were down 1.7 percent in December compared to a year ago.
"Although business conditions are showing signs of stabilising so far this year, which represents a marked improvement on the widespread deepening gloom seen late last year, the euro zone is by no means out of the woods," said Chris Williamson, the chief economist of the data compiler Markit.
"Demand needs to improve considerably in coming months before we can safely say that the region will return to anything like reasonable growth."
CHINA FEELS EURO ZONE EFFECT
An earlier preliminary survey of China's industrial activity, showed the overall manufacturing sector contracting for a fourth-straight month, although the HSBC flash PMI rose in February to 49.7 from 48.8 in January.
A export orders sub-index of the HSBC survey dropped to 47.4, its lowest level in eight months, and down from 50.4 in January as the European debt crisis cast a shadow over the Chinese export sector.
Asian shares eked out modest gains after the China manufacturing PMI data but the European numbers reversed the trend sending the MSCI global equity index down about 0.25 percent to 329.60.
China's economic growth is widely seen slowing down in January to March for its fifth consecutive quarter, prompting growing hopes of further policy easing measures from China's central bank. Economists expect full-year growth to slip below 9 percent for the first time in a decade.
The Chinese growth worries and its potential impact on demand for commodities and energy saw copper prices fall on Wednesday, reversing the previous session's sharp gains, and oil also edged lower.
Brent crude oil for April delivery fell from a nine-month high to $121.12 a barrel, 54 cents, and the copper price on the London Metal Exchange slipped 0.5 percent to $8,407.50 a tonne, although it is still up more than 11 percent this year.
The Japanese currency was also weakening against both the dollar and the euro as the rising price of oil added to the impact of an easier monetary policy stance by the Bank of Japan.
The yen fell to 80.22 to the dollar having hit a low of 80.30, its weakest since mid-July and below levels seen after the central bank intervened in August and October last year.
Spot gold was down 0.3 percent at $1,753.29 an ounce, having earlier touched a high of $1,759.84.
Debt markets were still absorbing the implications of the latest bailout deal for Greece which requires the country to implement tough austerity measures, seen as threatening its successful implementation, and imposes sharp losses for private sector holders of Greek government debt.
Germany sold 4.28 billion euros of two-year government bonds on Wednesday, in a sale which analysts said went well, as investors sought the safety of the euro zone benchmark despite below-inflation yields.
"(The auction result) is yet another indication that doubts remain and the market remains suspicious ... of a further deterioration of the debt crisis," Michael Leister, rate strategist at DZ Bank in Frankfurt, said.
Safe-haven German government bond futures hit the day's highs after the debt sale and in the wake of the latest economic data with the March contract rising 46 ticks to 138.43.