A sharp downturn in euro zone manufacturing activity for April sent the single currency and world shares lower on Wednesday, undermining hopes for a global economic recovery inspired by a pickup in US factory output and an improvement in China.
The weak data also looked set to send US shares lower, a day after its index of national factory activity posted the strongest growth rate in 10 months and sent the Dow Jones industrial average to its highest close in four years.
The drop in the Markit Eurozone Manufacturing Purchasing Managers' Index to 45.9 last month from 47.7 in March, followed a similar indicator from China which suggested the slowdown in the world's second biggest economy was stabilising.
"The China economy is holding up, but the debt crisis in Europe is weighing on growth and its rippling across the world," said Peter Dixon at Commerzbank.
Of further concern was data from Germany, Europe's largest economy, which showed its factories cutting back for a second month running in April. Combined with a similar picture in France, it indicated that the recession now gripping a large number of smaller European countries had reached the core of the 17-member currency union.
The euro was down against the dollar to its lowest level in a week at $1.3130, and a rush to safety by investors pushed German 5-year and 10-year bond yields to near record lows.
German Bund futures hit a record high of 141.53, and last traded up 35 ticks on the day at 141.44.
The FTSE Eurofirst index of top European shares, which initially gained around 1% on the US and Chinese data readings, was down 0.2% at 1046.10 points.
GROWTH POLICIES EYED
The latest from the euro zone adds to growing pressure on the region's political leaders and the European Central Bank to shift policy towards supporting growth and give less emphasis to imposing tough fiscal austerity measures.
ECB President Mario Draghi called last week for governments to agree a "growth compact", and his comments after Thursday's monthly policy meeting, where the bank is still expected to leave interest rates unchanged, will be crucial.
"Markets are shifting to price in the prospect of easing from the ECB, something that wasn't previously a market consensus move," said Steven Saywell, head of foreign exchange strategy for Europe at BNP Paribas.
The ECB's injection of cheap money into the European banking system in December and February did much to ease tensions in the financial markets and lift asset prices in the first quarter.
To many investors the central bank remains the key to ensuring another sharp selloff doesn't occur over the summer months. A recent poll by Reuters of 60 market economists found three quarters of the respondents expect the ECB to restart its government bond-buying programme within the next three months.
POLITICAL RISKS
Weekend elections in Greece and France which could see the arrival of more pro-growth governments, also added to fears of rising political tension over future policy direction at the heart of Europe.
Francois Hollande, front-runner and first-round winner in the French presidential race, has promised to shift the debate in Europe towards promoting growth if he is elected, raising concern about tensions between Germany and France.
However, others have played down such fears, saying Germany appears to be relaxing its focus on austerity.
In financial markets global growth is seen as the only long-term solution to Europe's woes and attention will soon switch to the health of the US jobs market and the non-farm payrolls report on Friday.
"The next jobs data (on Friday) will be more important than usual. If it is strong, it could cement expectations of strong recovery at least in the United States," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.
In share markets, solid gains in Asian and US markets failed to prevent the MSCI world equity index from dipping 0.1% to 328.94.
The dollar index, a measure of the dollar against a basket of major currencies, benefited from the renewed European concerns and rose 0.45% to 79.24.
Oil markets dipped as the weak economic data from Europe hit the demand outlook, and countered the more positive figures from China and the United States.
Brent crude for June slipped 30 cents to $119.36 a barrel and US crude for June was down 41 cents at $105.75.
Gold prices retreated towards $1,650 an ounce but remained within its recent ranges as the mixed signals on global growth and waning expectations of further easing in policy by the US Federal Reserves kept investors sidelined.
