European stocks dropped this afternoon, retreating for a second consecutive session after signs the crisis affecting the US high-risk mortgages sector was worsening, fuelling worries about the economy.
Banking shares were among the worst hit, while a drop in the US dollar to a record low against the euro weighed on shares of exporters.
At 11am, the pan-European FTSEurofirst 300 index was down 0.55 per cent, at 1,598.08. Despite the sharp two-day losing streak, Europe's benchmark index is still up 7.7 per cent so far this year.
"Trouble brewing in the subprime sector is back at the top of investors' worries," said Valerie Plagnol, chief strategist at CM-CIC Securities, in Paris.
"Coupled with that, there are yesterday's profit warnings from US companies related to the real estate sector, which give hints about the US macroeconomic picture," she said.
"The concern for Europe is to see what will exactly be the impact of all this on U.S. consumer spending."
Yesterday, US shares fell after two credit rating agencies started to slash ratings for more than $17.3 billion of US mortgage-related debt, raising concerns the sector's woes are worse than previously thought.
The news sparked selling in non-government bonds, stocks and the dollar, which prompted investors to flock to the safety of government debt.
"We're seeing a flight-to-quality in government bonds, but it has not prevented the dollar from dropping," Plagnol said.
The euro set a record high of $1.3784, according to Reuters data, before easing back to $1.3741.
In the financial sector, UBS lost 1.7 per cent, BNP Paribas shed 1.6 per cent and Credit Suisse dropped 1.3 per cent.