European stocks tumbled and the euro slid against the dollar Tuesday after Moody's warned that its credit rating for France could be put on negative outlook, reigniting eurozone debt fears.
Shares were also hit by weaker-than-expected Chinese growth data, news which weighed heavily on Asia-Pacific shares, while investors were nervous before the release of earnings news from Goldman Sachs and Bank of America.
London's FTSE 100 index of leading shares dropped 1.31 percent to 5,365.47 points in morning trade, as investors also reacted to a spike in British inflation.
Frankfurt's DAX 30 shed 1.0 percent to 5,800.58 points and in Paris the CAC 40 decreased 1.78 percent to 3,109.67 points.
"It is Moody's putting France's prized triple A credit rating on negative watch that is getting the bears out in force today," said Capital Spreads analyst Simon Denham.
The euro slipped to $1.3721 from $1.3734 late in New York on Monday, also on fading hopes that EU leaders will unveil firm plans to resolve the eurozone debt crisis when meeting at a summit this weekend.
"The temporary rebound in riskier currencies and the euro over the past month appears to be losing momentum as investor hopes that heightened eurozone sovereign debt tensions will soon be brought to end supporting global growth are beginning to fade," said Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ.
"There is little doubt that expectations that EU leaders will unveil a successful plan to stem the eurozone sovereign debt crisis heading into this weekend's crucial EU Summit are high leaving plenty of scope for disappointment. "The German government has already begun to try to downplay such hopeful expectations heading into this weekend's meeting," Hardman added.
Moody's on Monday warned that it may place a negative outlook on its cherished Aaa credit rating in the coming months as the government's financial strength "has weakened."
The annual credit report is a shot across the bow for the second largest economy in the eurozone, which currently enjoys the top credit rating from Moody's and rival ratings agencies.
Market sentiment was further hit on Tuesday with China announcing that its economic growth slowed to 9.1 percent in the third quarter as government efforts to tame inflation and turbulence in Europe and the US curbed activity.
Growth in the world's second-largest economy slowed from 9.5 percent in the second quarter to its lowest rate in two years, the National Bureau of Statistics (NBS) said.
Asia-Pacific markets closed sharply lower on the news, with Hong Kong diving 4.23 percent, Shanghai losing 2.33 percent, Tokyo shedding 1.55 percent and Sydney slumping 2.07 percent.
US equities sank on Monday after a weekend meeting of G20 finance chiefs failed to boost confidence that a solution to the eurozone debt crisis was near.
The Dow Jones Industrial Average closed down 2.13 percent, the broader S&P 500 lost 1.94 percent and the tech-heavy Nasdaq Composite slid 1.98 percent.