European stock markets retreated on Wednesday, extending the previous day's losses on eurozone strains and speculation that the US Federal Reserve could shortly begin withdrawing its economic stimulus, traders said.
London's FTSE 100 benchmark index tumbled 1.44 percent to 6,630 points as traders took a drop in unemployment and a statement by the Bank of England that Britain's economic recovery "has finally taken hold" as a sign that interest rates will rise sooner than expected.
Frankfurt's DAX 30 slid 0.24 percent to 9,054.83 points and the CAC 40 in Paris dropped 0.56 percent to 4,239.94 points.
Milan tumbled 1.43 percent and Madrid lost 0.33 percent.
ETX Capital trader Ishaq Siddiqi said that "continued Fed tapering woes curb enthusiasm for risk so traders are hesitant about putting all their chips on the table".
CMC Markets trader Toby Morris added: "Some investors are also beginning to turn their heads more to the potential deflation risk in the eurozone."
"Should deflation risk continue to hit headlines, the expectation would be money flows out of equities and back into the protection of bonds."
In a surprise move last week, the ECB shaved a quarter of a percentage point off its central refinancing rate to a historic low of 0.25 percent, amid concerns that slowing inflation in the euro area could turn into a vicious cycle of falling prices.
Eurozone industrial output, a key measure of manufacturing activity, turned lower in September, falling 0.5 percent from August when it rose 1.0 percent, official data showed on Wednesday.
With third-quarter growth data due Thursday, the September reading for the 17-nation eurozone is in line with other recent figures suggesting only a very modest recovery.
Days of 'rock-bottom interest rates' numbered
In London, official data out Wednesday showed Britain's unemployment rate had fallen to a four-year low point, putting pressure on the Bank of England to raise its record-low interest rate sooner than expected.
Unemployment in Britain dropped to 7.6 percent in the three months to September from 7.7 percent in the quarter ending in August, the Office for National Statistics (ONS) said.
Britain's economic recovery has meanwhile "finally taken hold", the Bank of England said on Wednesday as it upgraded its growth forecasts despite headwinds from the eurozone debt crisis.
"It seems the days of rock-bottom interest rates may be coming to an end sooner than initially anticipated, and the London equity market is off over 1 percent as a result," said market analyst David Madden at IG brokerage.
The Bank of England, under new head Mark Carney, does not plan to raise its main interest rate from its record-low level of 0.50 percent at least until Britain's unemployment rate falls to seven percent, under a so-called "forward guidance" policy.
While Carney said when taking office in July that he didn't see rates rising for three years, Madden said it appears the forward guidance criteria may be met within 18 months.
That sent the British pound sharply higher, rising by 0.66 percent to 1.1916 euros and to $1.6032.
The euro on Wednesday rose to $1.3462 from $1.3434 late in New York on Tuesday. The dollar slipped to 99.26 yen from 99.63 yen.
On the London Bullion Market, the price of gold fell to $1,272.50 an ounce from $1,281.25 on Tuesday.
Asian stock markets fell on Wednesday following losses in New York, while investors were also unimpressed with the lack of clarity in an economic reform plan from China's leadership, traders said.
Expectations are meanwhile growing that the Federal Reserve could start tapering its $85-billion-a-month asset purchase, or quantitative easing (QE), programme next month or in January.
US stocks were mostly lower on continued uncertainty on when the US Federal Reserve may scale back its bond-buying programme.
In midday trade the Dow Jones Industrial Average fell 0.39 percent to 15,689.18 points.
The broad-based S&P 500 slid 0.11 percent to 1,765.74, while the tech-rich Nasdaq Composite Index edged up 0.04 percent to 3,921.35.
Fed Chairman Ben Bernanke was scheduled to speak later Wednesday.