European shares fell sharply and the euro slipped towards a two month low on Friday, as weak economic data from Italy, France and Britain added to concerns about possible U.S. spending cuts and political stalemate in Rome.
British manufacturing shrank unexpectedly and new orders dwindled in February, while France's factories suffered their 20th consecutive monthly fall in orders, new surveys showed.
It points to a largely poor start to the year for all of Europe's big economies barring Germany, which continues to grind out improvement. Its manufacturing sector grew for the first time in a year as export orders hit a 21-month high.
European shares and euro had been in positive territory ahead of the data but tumbled on the disappointment which further dented hopes of a quick rebound by the bloc's economy.
Britain's Markit/CIPS Manufacturing PMI fell to 47.9 from a downwardly revised 50.5 in January, confounding forecasts of a rise to 51.0. It was the first reading below the 50 line that separates growth from contraction since November.
"The concern is that manufacturing trends are diverging strongly within the euro zone," said Chris Williamson, chief economist at data collator Markit.
"A revival in export orders and resilient domestic demand has helped propel Germany's growth so far this year, while deteriorating domestic demand is holding back the economies of France, Italy and Spain," Williamson said.
By 1130 GMT, the euro was on the brink of a two-month low versus the dollar having fallen 0.2 percent to $1.3025. The drop was being influenced by the dollar's wider market strength as it hit a 6-month high versus a basket of major currencies.
After a turbulent week, the pan-European FTSEurofirst also reacted badly to the data as it fell to a session low to leave it down 0.9 percent on the day despite a positive start.
Italy's main FTSE MIB stock market was leading the slide, down almost 1.7 percent and 3.7 percent lower on the week, as figures showing its unemployment rate hit a 21-year high added to concerns about its political stalemate.
U.S. SPENDING CUTS
The big worry is that political problems in Italy, the euro zone's third-largest economy, could reignite the bloc's crisis, now in its fourth year.
Some economist have even questioned whether the European Central Bank's pledge to help struggling member states which ask for aid can be utilised if there is no workable government.
Italian bonds were again under pressure after their worst week in six months. Yields, which rise as prices go down, had recovered from an earlier spike to stand almost flat on the day at 4.73 percent, but remained well above the 4.45 percent they started the week at.
Also weighing on financial markets was the gradual introduction of automatic U.S. spending cuts worth $85 billion after U.S. lawmakers failed to reach a compromise deal.
The International Monetary Fund said on Thursday it would probably slice 0.5 percentage points off its 2 percent 2013 growth forecast for the world's biggest economy if the cuts are fully implemented.
Oil prices slipped almost $1 to a six-week low of $110.3 a barrel, weighed down by the potential impact on demand for crude.
"Once it kicks in it will have a big fiscal impact but the market's assumption is that any tightening is going to be offset by monetary policy," said Ian Stannard, executive director at Morgan Stanley.
"The market is of the view that if there's a fiscal tightening, which causes a significant negative impact on economic prospects and the labour market, then the Fed will have to respond," he added.
As well as a possible hit from the U.S. issues, a new survey showing China's factory growth cooled in February also damped the mood in commodity markets..
Growth-attuned copper fell to its lowest in more than two months, following a more than 4-percent drop in February. Platinum hit a seven-week low.
"The PMIs were pretty nasty. We got the poor flash HSBC PMI earlier in the week and the real ones are no better. Clearly the situation in China is not as good as people had hoped," said analyst Nic Brown at Natixis in London.