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 The pan-European FTSEurofirst 300 stocks index fell 2.6 percent,
reversing a trend that had seen stocks rise in Asia. Wall Street was
expected to open lower, according to index futures.
An index of Europe-listed mining shares dropped 5 percent after
copper retreated 2.7 percent.
Worries over a slowdown in the Chinese economy have weighed on
markets in recent weeks, and preliminary factory activity data for
September will be a focus for investors on Wednesday.
"If China manufacturing numbers come in better than expected
tomorrow, we could see a rebound in mining stocks for some days, but
the sector's medium-term outlook remains bearish," Christian
Stocker, equity strategist at UniCredit in Munich.
A further fall in shares of German carmaker Volkswagen, which has
admitted cheating on vehicle emission tests, also took a toll on the
FTSEurofirst, as an investigation of the cheating spread to Asia. VW
shares were last down 22 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan gave up
earlier gains and was last 0.3 percent.
Chinese shares rose, with the Shanghai Composite and the CSI300
index of the largest listed companies in Shanghai and Shenzhen both
closing up about 0.9 percent.
Japanese markets were closed for a holiday.
Currency markets were driven by the differing expectations for
monetary policy at the world's major central banks.
The U.S. Federal Reserve held policy steady last week, citing risks
to global growth. But Atlanta Fed President Dennis Lockhart said on
Monday he still expected rates to rise this year and St. Louis Fed
chief James Bullard said there was a chance of a hike next month.
By contrast, European Central Bank officials have been stressing
monetary policy in the euro zone will remain loose for some time.
Governing Council member Ewald Nowotny said on Monday ECB rates
would stay low as long as growth did.
The divergence between the Fed on the one hand and the ECB and Bank
of Japan on the other helped push the dollar to its highest since
Sept. 10 against a basket of currencies.
The euro was down 0.2 percent at $1.1162, having hit a high of
$1.1459 on Friday. The dollar eased 0.6 percent to 120.03 yen per
dollar but was well above Friday lows.
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"As long as the markets continue to calm down, particularly emerging
markets, there is definitely a reason to trade the dollar slightly
higher, but not too much," said Commerzbank FX strategist Esther
Reichelt in Frankfurt. "Too much dollar strength could worsen the
inflation outlook and could lead to the Fed not hiking."
Expectations of a prolonged period of low ECB rates, and the fall in
stocks, pushed down yields on low-risk euro zone debt. German
10-year Bund yields hit a one-month low at 0.62 percent, down 6
basis points on the day.
The ECB launched a trillion-euro bond buying program in March, but
has failed to raise the market's long-term inflation expectations.
"I'm not too convinced that they are signaling they are ready to do
something in October, but it does support our view that if nothing
changes between now and December, the ECB may have to add more
stimulus," said Elwin de Groot, senior market economist at Rabobank.
Oil prices fell as concern over global growth weakened the outlook
for demand and as traders took profits from a rise of 3 to 4 percent
on Monday.
Brent crude, the global benchmark, was down 79 cents a barrel at
$48.13. Gold eased with stocks and commodities. It last traded at
$1,131.20 an ounce.
(Additional reporting by Nichola Saminather in Singapore, Jemima
Kelly, Marius Zaharia and Atul Prakash in London; Editing by Larry
King)
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