In the UK the FTSE 100 index of leading shares ended down 66.6 points, or 1.2%, to 5,427.8 at its close a short while ago.
It was the index's biggest daily points fall since the bombings in London on 7 July when the benchmark shed 70 points.
Then benchmark was hit by concerns over inflation in the US and as a result of several large stocks, including BP and PartyGaming fell after analyst downgrades.
The drop was sparked by comments from a Federal Reserve official, triggering concerns over rising interest rates and the impact they could have on business costs and consumer spending. A weak Wall Street performance for yet another session also weighed on sentiment.
PartyGaming fell 7.5p, or 8%, to 86.25p after analysts cut its rating to "neutral" and slashed its price target to 100p.
Elsewhere on the downside, BP, also hit by analyst downgrade to "hold", lost 21p or 3.2%, to 634.5p.
Mining stocks were among the heaviest fallers after a rout in Australia's resource-heavy stock market prompted profit-taking. Xstrata, fell 75p or 5.12%, to 1389p, Rio Tinto, dropped 93p, or 4.03%, to 2214p and Anglo American, lost 68p, or 4%, to 1591p.
In the US, the Dow Jones Industrial Average has fallen 61.62 points, or 0.6%, to 10,376.49 in morning trading. Delphi, the biggest US auto-parts supplier, has slumped $0.25 to $2.53 after reports suggested this morning the company is ready to file for bankruptcy.
Wright Medical Group, a maker of joint replacements, has lost $4.89 to $19.24. The company cut its full-year earnings forecast yesterday, citing slower-than-expected sales in biologics products and demand from Italy and France. Wright Medical expects to earn as much as $0.70 a share in 2005, down from a July prediction of at least $0.85.
Yum! Brands, operator of the KFC, Taco Bell and Pizza Hut chains, has advanced $1.12 to $49.39. The company has increased its full-year profit forecast by $0.02 to $2.64 a share, excluding some items.
Meanwhile TXU, the largest Texas power seller, has added $2.33 to $109.19. The company plans to raise some electricity rates by 24% because of surging fuel costs.IFAonline
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