By Richard Hubbard
LONDON (Reuters) - European shares and the single currency fell sharply on Thursday when surprisingly weak euro zone economic data dashed hopes of an early recovery for the recession-hit region this year.
Economists had forecast the euro zone purchasing managers' indexes (PMIs), based on surveys of business activity, would add to tentative signs a recovery was under way, but instead they pointed to a first-quarter contraction of up to 0.3 percent.
"The expectation was the trend of improvement for the euro zone as a whole would continue and it hasn't, so that is a disappointment," said BNP Paribas economist Ken Wattret.
The euro tumbled to a fresh six-week low below $1.32 on the news, having already suffered at the hands of a resurgent greenback following signals from the U.S. Federal Reserve on Wednesday that it was considering an end to monetary stimulus.
Signs that Fed policymakers were becoming increasingly reluctant to continue aggressive monetary easing, revealed in the minutes of the last policy meeting, had sparked a worldwide selloff in riskier asset markets.
More From This Section
MSCI's world equity index, already down 0.5 percent on the doubts about future Fed policy, took another step down after the PMI data to be one percent lower for the day, having touched its best levels since mid-2008 on Wednesday.
Europe's Eurofirst 300 index shed 1.25 percent, on track for its second biggest daily loss of the year. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were all down as much as 1.8 percent lower.
SAFETY PLAYS WELL
In the fixed income market, German bonds, considered a safe haven, hit their best levels for a month with the main Bund futures contract up 91 ticks to 143.33. The move reversed a fall seen on Wednesday and was also being supported by the approach of an Italian general election this weekend.
"Investors are becoming more and more cautious ahead of the weekend ... and altogether people decided here to pull the trigger and go risk-off," said Christian Lenk, a strategist at DZ Bank.
The dollar, another safety play, followed up its big gains on Wednesday adding a further 0.45 percent on an index value that includes most major currencies, although it slipped against the yen to 93.35.
The Markit composite PMI for the euro zone, which combines both services and manufacturing surveys, fell to 47.3 in February from 48.6. It had been expected to rise to 49.0.
The data also showed a growing gap between Germany and France - the two biggest economies in the euro zone - which could have implications for the European Central Bank's future monetary policy.
The survey found firms in Germany are enjoying a healthy rate of growth, while French service sector companies are in the midst of their worst slump since the financial crisis was at a peak in early 2009.
"The theme is still the very substantial divergence between France and Germany and that is going continue to be the case for much of the year," said Wattret of BNP Paribas.
"On the margins this is going to resonate with the dovish tone from the ECB at its last meeting, but I think the real swing factor for the ECB will be exchange rate factor and the tightening impact it is having."
The strength of the euro has been holding back exports.
In commodity markets, the prospect of weakening demand from Europe and a possible early end to the Fed's policy of quantitative easing sent all markets lower.
London copper struck its lowest in nearly two months, at $7,870 a tonne, while oil dropped below $114.50 a barrel for the first time this month having seen its biggest daily fall of the year on Wednesday.
Growth-attuned precious metal platinum fell 3 percent to hit a five-week low. Traditional safe haven gold popped higher, to $1,568 an ounce, after the Fed minutes had pushed it to a seven-month low.
"Long-position holders have been looking to sell for profit-taking," said Yusuke Seta, a commodity sales manager at Newedge Japan. "I guess this is a good time to sell."
(Additional reporting by Marc Jones.; Editing by Alastair Macdonald)