European stocks slide on stimulus fear

European stocks fell sharply on Tuesday as investors grew increasingly concerned key central banks would step back from stimulus efforts that have been helping boost markets all year.

Sentiment turned sour early off losses in Asia, after the Bank of Japan, which has helped spark price rallies worldwide with its hugely accommodative policies, stayed quiet on any new stimulus measures.

"The Bank of Japan slightly surprised investors this morning when it omitted to do or say anything to calm the volatility that has been a recent feature of Tokyo bond and equity markets," said a note from analysts at Moneycorp. analyst Patrick O'Hare added: "Central banks around the world are struggling with their communication as they attempt to manage market expectations about their extraordinary support measures."

Indications by the US Federal Reserve that it could soon begin tapering off its monetary stimulus has unnerved markets for the past few weeks.

At close, London's FTSE 100 index of leading shares fell 0.94 percent to 6,340.08 points, Frankfurt's DAX 30 index dropped 1.03 percent to 8,222.46 points, while in Paris the CAC 40 sank 1.39 percent to 3,810.56 points.

US stocks dropped more moderately in midday trade Tuesday, with the Dow Jones Industrial Average off 0.05 percent, the broad-based S&P 500 down 0.26 percent and the tech-rich Nasdaq Composite Index dropping 0.33 percent.

Traders were also eyeing a key German court hearing on the legality of the European Central Bank's bond-purchasing programme which has calmed financial markets since its launch last summer.

Germany's highest tribunal, the Constitutional Court, began two days of hearings on Tuesday to decide whether the ECB's controversial OMT bond purchase programme is compatible with Germany's Basic Law.

Ever since the ECB unveiled the OMT to buy up the sovereign debt of the euro area's most debt-wracked members last August, fears of a break-up of the single currency have receded.

The ECB's witness, executive board member Joerg Asmussen, told the court the programme was the "necessary and appropriate step" to eliminate market turmoil "caused by concerns that there would be an unwanted break-up of the euro."

Without a single OMT ever being carried out, Europe's battered financial markets have enjoyed a period of relative calm.

Nevertheless, some critics argue that the OMT oversteps the ECB's mandate and is therefore unconstitutional.

In foreign exchange deals, the European single currency climbed to $1.3265 from $1.3258 late in New York on Monday.

The dollar dropped to 96.89 yen from 98.71 yen on Monday.

On the company front, the mining sector was hit particularly hard in London, pulled lower by Chinese and Europan growth worries.

At close, Fresnillo lost 3.76 percent to 1,076 pence, Glencore Xstrata sank 3.75 percent to 302.5 pence and Anglo American lost 3.52 percent to 1.371.5 pence.

Luxury goods group Burberry meanwhile lost 4.84 percent to 1,358 pence also over doubts on Asian growth.

In Frankfurt, insurer Allianz slumped 2.31 percent to 114.1 euros after ratings agency Fitch said the floods hitting Germany could be more expensive than a similar disaster in 2002.

Asian markets mostly fell on Tuesday following the previous day's rally, with Tokyo tumbling more than two percent at one point.

Dealers were left disappointed by the lack of news from the BoJ, with Tokyo's Nikkei, which surged almost five percent Monday on upbeat US jobs news, ending down 1.45 percent.

Seoul fell 0.62 percent and Hong Kong was off 1.20 percent, while Sydney added 0.41 percent. Shanghai was closed for a public holiday.

In trading on the London Bullion Market on Tuesday, the price of gold fell to $1,374.25 an ounce from $1,383.25 on Monday.