European stocks dropped for a third day amid signs the US may fail to reach an agreement on budget cuts, raising the prospect the world's largest economy could face another credit downgrade.
The benchmark Stoxx Europe 600 Index sank 2.9 per cent to 225.45 at 3.37pm in London, extending last week's 3.7 per cent selloff. Stocks tumbled around the world last week as the yields on Italian and Spanish bonds climbed, and the cost of insuring against losses on the nations' debt rose.
"The US budget situation is a further drag on sentiment," said Paul Coffin, a fund manager at Fieldings Investment Management Ltd. in London. "The market is still being dominated by the European situation. The US budget is probably secondary to the euro zone's problems."
The US congressional deficit-reduction committee was set to formally announce its three-month-long effort to bridge partisan differences over taxation and spending has failed, aides told Reuters.
"Europe is not the only one with deb European stocks dropped for a third day amid signs U.S. lawmakers may
fail to reach an agreement on budget cuts, raising the prospect the world's largest economy could face another credit
downgrade. t problems, and at least on this side of the Atlantic, progress has been made while in the United States, there's a political gridlock," said David Thebault, head of quantitative sales trading, at Global Equities.
Automatic spending cuts of $1.2 trillion over a decade are due to start in 2013, after elections in 2012, if the "super committee" of six Democrats and six Republicans cannot agree.
"It is a minor negative, there are a few questions to be asked - do Moody's and Fitch for example move to downgrade the US," said HSBC's head of global equity strategy, Garry Evans.
The committee was created after a battle over the federal government's debt ceiling nearly shut it down and led to a first-ever cut in the United States' AAA credit rating by Standard & Poor's in the summer, roiling financial markets.
Europe's messy politics, however, appeared to be heading in the direction of carrying out vital fiscal reforms, offering some relief to investors.
National benchmark indexes retreated in all 18 markets in western Europe. France's CAC 40 Index slid 3 per cent and Germany's DAX Index lost 3.1 per cent. The UK's FTSE 100 Index dropped 2.3 per cent.
Greece's ASE Index sank 3.7 per cent as the country's new prime minister Lucas Papademos met European Union president Herman Van Rompuy and European Commission president Jose Barroso in Brussels today.
In Spain, the centre-right opposition People's Party won a crushing election victory and was expected to push through drastic austerity measures to try to prevent Spain being sucked deeper into the debt storm threatening the euro zone.
"Those policies would undoubtedly be welcomed by markets, yet may not be enough to stabilise the Spanish sovereign," Barclays Capital analysts said in a research note. "Ultimately, we think it is likely that the ECB will need to step up its support."
The ECB has resisted rising pressures to step up purchases of euro zone sovereign debt, or the idea of lending to the International Monetary Fund to bail out troubled euro zone economies, despite a growing market perception of the bank as the last hope to stop the debt crisis from spreading globally.
Agencies
