Hit hard by deflation scares, Frankfurt retreated across the board. The Xetra DAX index tumbled back through the 5,000 support level to close off 139.74, or 2.8 per cent, at 4,918.55. The latest inflation figures were far weaker than expected and at 0.2 per cent the lowest rate since panGerman records began in 1991. Combined with a gloomy INSEE business survey from France, it cast a deep cloud over sentiment.

The lack of confidence was reflected in a steep slide for heavyweight DaimlerChrysler which lost €4.60, or 5.1 per cent, at €87 in spite of strong results and an upgrade to "accumulate" from "neutral" at Merrill Lynch. Insurers were weak. Allianz, which threatened to remove key operations from Germany should the government press ahead with tax reforms, fell €12 to €274.

Paris put an end to its five-day run, closing 1.5 per cent lower following Wall Street's retreat overnight. The CAC-40 finished 61.14 off at 4,152.56 as the eagerly awaited February INSEE industrial survey showed a small improvement in production offset by high levels of stocks and price expectations near record lows.

L'Oreal fell €26 to €585 despite in-line 1998 results after analysts said the share was too expensive and Paris-based broker CDC-Bourse cut its rating. Renault dropped 4.7 per cent despite expectations that it would report strong results on Monday. The stock lost €2.20 to €44.60. Amsterdam ended in the middle of its day's trading range on the AEX index, closing down 4.33 at 534.51. DSM's attempts to soften a warning of difficult trading at the start of this year with news that it was in talks aimed at a big drugs acquisition within six months came to little. The shares ended €3 lower at €78.40 after a session low of €78.10.

Unilever continued to unwind the gains racked up earlier this week ahead of the announcement of a special dividend. The stock shed 85 cents at €67.45. Milan followed neighbouring markets lower although some selective buying enlivened an otherwise dull market. The Mibtel index lost 503, or 2.1 per cent, to 24,017. Fiat turned back from a high of €2.84 to close little changed at €2.71 following newspaper speculation that it was interested in Sweden's Scania truck-maker and in Japan's Mitsubishi.

Stockholm also fell, with the general index losing 37.17 or 1.1 per cent to 3,355.72. Bucking the trend, Scania added four krone (45 cents) to SKr211 (€23.5) after the Fiat rumours.