European stocks fell to a two-year low amid speculation the euro zone's debt crisis could be spreading to France, despite opening in positive territory.
French banks' shares tumbled in Paris trading even after a Societe Generale spokeswoman denied rumours of trouble. Societe General, where US traders have focused their attention, fell 14.7 per cent and BNP Paribas dropped 9.5 per cent.
French president Nicolas Sarkozy has cut his holidays short amid concerns that France could become the next AAA-rated country to get downgraded.
Other French banks also fell sharply with Credit Agricole off more than 14 per cent on persistent rumours about a downgrade, despite confirmation from the three major ratings agencies that their French sovereign rating outlook is stable.
"The rumours on the French triple-A rating are having a catastrophic impact, even despite the denial from credit agencies. Shorts are on a rampage; it's a calamity. This has nothing to do with fundamentals," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion in Paris. The French CAC 40 stock index fell 5.5 per cent overall.
The benchmark Stoxx Europe 600 Index slid 3.7 per cent in London, erasing an earlier advance of 2.2 per cent. The FTSE 100 lost 3 per cent and Germany's DAX declined 4.4 per cent at close. The Iseq in Dublin was down 2.3 per cent at 2,409.84.
The Iseq held up slightly better, slipping 56.5 points, or 2.3 per cent, to 2,409.84.
Switzerland's central bank, meanwhile, said it was expanding measures to fight against the Swiss franc's strength. Investors have been pouring into the currency as a safe haven during recent market and economic weakness.
The euro tumbled against the US dollar on increasing concerns that Standard & Poor's could initiate ratings action on sovereign debt in Europe after downgrading US debt last week. The euro fell to a session low of $1.4243 and last traded at $1.4246, down 0.9 per cent on the day.
Bond markets continued to steady as the European Central Bank again intervened to support Italian and Spanish debt. The yield on 10-year Italian bonds is now at 5.10 per cent, while the Spanish rate has declined to just over 5 per cent.
Ireland’s 10-year bond yield stood at 9.56 per cent after falling below the 10 per cent mark yesterday for the first time since April.
Earlier today, Japan's Nikkei share average snapped a three-day losing streak, though blue-chip exporters fell as the yen regained steam. The benchmark Nikkei average closed up 1.1 per cent at 9,038.74, while the broader Topix gained 0.8 per cent to 776.73.
US central bankers last night said they would hold interest rates at historic lows for at least two years in an effort to boost confidence in the economy.
The move, the first time the US Federal Reserve has committed itself to such an action, came on a day when stock markets recovered some of the ground lost in recent tumultuous sessions.
Additional reporting: Reuters