Pan-European benchmarks slumped to five-year lows yesterday afternoon as fears of political instability in Germany added to economic and corporate earnings concerns, while oil prices surged as the war drums beat louder.
Beleaguered French telecoms equipment group Alcatel led the rout, losing 16 per cent after Canada's JDS Uniphase Corp, the world's No.1 maker of fibre-optic components, lowered its first-quarter sales guidance.
Insurers were also pummelled, with Germany's Munich Re down 10.4 per cent after its price target was cut by Morgan Stanley amid concerns about the falling value of its large equity portfolio.
"Insurance companies currently have little going for them," said analysts at SG Securities.
"They lack pricing power in life assurance and their prudential ratios have been hit by a fall in unrealised capital gains and higher premium rates. We recommend waiting for the forthcoming wave of rights issues before...moving back into the sector."
By 1450 GMT, the FTSE Eurotop 300 index of pan-European blue chips was down 3.9 per cent at 816 points.
That marked the benchmark's weakest intraday level in more than five years and left it on course for its weakest close since the spring of 1997.
Falling stocks outnumbered gainers by more than 13-to-one. The narrower DJ Euro Stoxx 50 index was also at five year lows, down 4.5 per cent at 2,204 points.
Analysts said investors had been disheartened by the result of Sunday's elections in Germany, which returned the incumbent government to power with a sharply reduced majority.
With Europe's biggest economy stalled, unemployment stuck at around 10 per cent and stock markets mired at their lowest level in over five years, investors had hoped a conservative-liberal coalition would initiate structural reforms.
In New York, the Dow Jones industrial average was down 2.4 per cent, while the Nasdaq Composite shed 2.7 per cent to hit yet another five-year low.
On the data front, US leading indicators fell for the third straight month in August, by a slightly worse-than-expected 0.2 per cent, confirming economists fears of a slowdown in the world's largest economy.
"The fourth quarter is shaping up to be weaker in the US than the third quarter, but we already knew many of the components before today," said Mark Wall, economist at Deutsche Bank, on leading indicators data.
The oil and gas sector outperformed the rest of the market, as a spike in crude oil prices due to the threat of a US-led attack on the United States helped counter concerns over easing demand.