A stark warning from the IMF about the global growth outlook and the prospects for Spain and Greece sent European stocks and the single currency lower on Tuesday, while oil rose on escalating tensions in the Middle East.
The gloomy IMF report came as riskier asset markets like equities are on the hunt for signs of improving economic activity after prices rose sharply last month when the world's major central banks eased policy aggressively.
The weaker outlook from the IMF and its potential to affect corporate earnings sent the FTSEurofirst 300 index <.FTEU3> of top European shares down 0.2 percent to 1,098.80 points, adding to a loss of 1 percent on Monday.
The euro zone's blue chip Euro STOXX 50 index <.STOXX50E> was down 0.4 percent to 2,486.36 points.
"The main driver for the market is the IMF report on Greece and they also have a more negative view on Spain, which raises questions about whether the budget deficit targets for next year will be achieved," said RIA Capital Markets strategist Nick Stamenkovic.
In its latest World Economic Outlook, the International Monetary Fund cut its 2012 global growth forecast to 3.3 percent from the 3.5 percent expected in its July report.
The IMF also warned that any failure by policymakers in the United States and Europe to fix their economic problems could even prolong the current slump.
World shares as measured by the MSCI world equity index <.MIWD00000PUS> fell 0.2 percent.
European Central Bank President Mario Draghi added his weight to the growth concerns, telling European lawmakers meeting in Luxembourg he expected weak activity to continue with the risks to even this forecast on the downside.
"Some things have improved in the last to two or three months, but I think the road ahead is still long and it's uphill," Draghi said.
The growth worries offset a slightly more positive mood in Asian markets which followed China's injection of around $42 billion of cash into its money markets. That boosted speculation its central bank may soon do more to support slowing growth.
The MSCI index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> added 0.5 percent, pulled higher by rises in Hong Kong and China shares after the move.
"Given the softness in the economy and given where inflation is, there is certainly scope for China to be more active on the policy front," said Ian Richards, global head of equities strategy at Exane BNP Paribas.
EURO ZONE PROGRESS EYED
Apart from the IMF report, the focus in Europe was on a summit of finance ministers and a visit to Athens by the German Chancellor Angela Merkel, closely watched for signs of progress in resolving the region's debt crisis.
The finance ministers and the IMF were reported on Monday to have held a "thorough and robust" debate on Greece, but failed to make significant progress in deciding how best to get the country back on track with its bailout programme.
Greece is locked in talks with its "troika" of lenders - the European Union, European Central Bank and International Monetary Fund - to secure the next tranche of a 130-billion-euro ($170-billion) loan package, its second bailout since 2010.
Without the next 31.5-billion-euro payment, Greece says it will run out of money by the end of November.
The finance ministers also appeared to dash market hopes of an early bailout request from Spain by saying the country was taking steps to overhaul its economy, and successfully funding itself in the financial markets.
Investors are waiting for Spain's bailout request as it would trigger a new round of bond buying by the ECB which would likely lift the euro and send Spanish bond yields sharply lower.
"While uncertainty about Spain plays out, investors are also getting worried about the Greek situation," said Adam Myers, senior currency strategist at Credit Agricole.
The lack of progress on both fronts saw the euro fall to $1.2907, well below a two-week high of $1.3072 hit on Friday. Spanish 10-year yields were up 5 basis points at 5.78 percent.
Attention in the oil markets was on the deteriorating situation in Syria and a warning from Turkish President Abdullah Gul that the worst case scenarios between his country and Syria are now playing out.
Turkey's armed forces have bolstered their presence along the 900-km (560-mile) border with Syria in recent days and have been responding in kind to gunfire and shelling spilling across from the troubled country.
"Right now the market is concerned about the continuing conflict between Syria and Turkey, and the worry is that if it escalates, it may disrupt supplies," said Ker Chung Yang, senior investment analyst at Phillip Futures in Singapore.
The most active Brent futures contract was up 0.5 percent to $112.71 per barrel while its premium over U.S. oil jumped to around $22.50 per barrel, the highest since October 20 last year.
(Additional reporting by Ramya Venugopal in Singapore and; Editing by Peter Graff)