Europeam equities sank on Tuesday on fears over debt-riddled Spain after its central bank predicted a worsening recession, one day after Moody's downgraded credit ratings for five major Spanish regions.
Madrid's IBEX 35 index of top shares dived 1.33 percent to 7,772.30 points in late morning deals, as Spanish bond yields crept higher and bailout concerns intensified, dealers said.
London's FTSE 100 index of top companies fell 1.15 percent to 5,814.81 points, hit by fresh gloom in the retail sector following a profits warning from luxury handbag maker Mulberry.
Frankfurt's DAX 30 dropped 1.34 percent to 7,229.94 points and in Paris the CAC 40 index was down 1.20 percent at 3,442.04.
In foreign exchange trading, the European single currency weakened to $1.3038 from $1.3060 late in New York on Monday. Gold prices slid to $1,717.18 ounce on the London Bullion Market from $1,726.75.
The Bank of Spain on Tuesday forecast that a job-destroying recession kept a tight grip on the nation's economy in the third quarter of 2012 when output shrank by an estimated 0.4 percent.
If confirmed, the figures would mean that the Spanish recession, which has left one in four workers unemployed, is moving into a second year at a relentless pace.
The news came as Moody's cut its debt rating for five Spanish regions by one or two notches each, blaming their weak financial positions and looming debt redemptions.
"Stocks are in the red across Europe... after rating agency Moody's downgraded five Spanish regions," said market analyst David Madden at trading group IG.
"The credit rating for the Spanish government remains unchanged at one notch above junk status, but this will still put pressure on the Madrid government, because the semi-autonomous regions will need to lean on Madrid even more."
Extremadura was cut to Ba1 due to a "persistently high" operating deficit and frail liquidity. Andalucia (Ba2), Castilla-La Mancha (Ba3), Catalunya (Ba3) and Murcia (Ba3) were all cited for poor liquidity and large maturing debt obligations.
"Last night's downgrade of five Spanish regions... is likely to keep the pressure on the Spanish government's finances, given that the regions are likely to become much more reliant on the central government bailout funding facility as their interest costs rise," added CMC Markets analyst Michael Hewson.
The gloomy news followed mixed regional elections over the weekend for Spanish Prime Minister Mariano Rajoy.
Rajoy won a landslide in his home region of Galicia, but separatist forces gained ground in a regional election held the same day in the northern Basque country.
In London, the top-end consumer goods sector was in focus after Mulberry warned that annual profits would be lower than last year, due to falling wholesale revenues and international retail sales.
In reaction, Mulberry shares slumped to 925 pence. It later stood at 1,000 pence, down 24.24 percent from Monday's closing level.
Rival luxury goods firm Burberry saw its share price tumble 4.01 percent to 1,125 pence. Earlier this month, Burberry said group sales growth slowed during its second quarter.
The Mulberry news also hurt the French luxury goods sector on Tuesday. Shares in fashion groups LVMH and PPR slid by 1.12 and 1.42 percent respectively, to stand at 123.70 and 132 euros.