European stocks drop ahead of Fed meeting

European stock markets dropped on Tuesday amid investor caution as the US Federal Reserve faces decisions on whether to start scaling back its huge stimulus programme.

Indices fell on profit-taking a day after rising sharply amid largely positive eurozone economic data, traders said.

London's benchmark FTSE 100 index dropped 0.42 percent to stand at 6,494.96 points in afternoon trading.

Frankfurt's DAX 30 slipped 0.38 percent to 9,128.98 points and the CAC 40 in Paris shed 0.91 percent to 4,082.56 compared with Monday's closing values.

"Yesterday's rally led many to believe that tapering had either been fully priced in or that investors did not believe the Fed would act at this month's meeting," said Craig Erlam, market analyst at Alpari traders.

The Fed starts a two-day monetary policy meeting on Tuesday when it must weigh whether the US economy is strong enough to cut back its $85 billion-a-month stimulus programme.

Global markets have mostly fallen over the past week as investors speculate about the future of the Fed's bond-buying, which had helped fuel an equities rally since it was unveiled in September last year.

A strong report Monday on US industrial output increased the chances of a swift start to Fed tapering, according to analysts.

In Europe's biggest economy Germany, investors ended the year in upbeat mood with sentiment hitting a seven-and-a-half year high amid optimism about the outlook for 2014, a survey on Tuesday showed.

The widely-watched investor confidence index calculated by the ZEW economic institute jumped by 7.4 points to 62.0 points in December, its highest level since April 2006.

"With regard to 2014, financial market experts are quite optimistic. Despite rather disappointing economic data released recently, they expect economic developments in Germany and the eurozone to improve further in 2014," said ZEW chief Clemens Fuest.

Against a background of concern about unusually low inflation in several countries in western and central Europe, a number of central banks announced rate decisions. Sweden, Hungary and Serbia cut their key rates.

In foreign exchange trading on Tuesday, the euro firmed to $1.3763 from $1.3761 late in New York on Monday.

The European single currency climbed to 84.50 pence from 84.41 pence on Monday. The British pound fell to $1.6285 from $1.6299.

Sterling was weighed down by official data showing that Britain's 12-month inflation fell to 2.1 percent in November, the lowest level for four years, as food and energy price rises slowed.

Gold rose to $1,237.25 an ounce on the London Bullion Market from $1,234.75 on Monday.

In company movement, Britain's biggest retailer Tesco said it had applied to open supermarkets in India, one of the first global retailers to try to enter the tough market since Delhi removed foreign investment barriers last year.

Tesco shares were down 1.77 percent at 325.15 pence in London midday deals amid amid the key festive trading period.

US stocks opened little-changed. Six minutes into trade, the Dow Jones Industrial Average advanced 0.07 percent to 15,896.29.

The broad-based S&P 500 fell 0.11 percent to 1,784.58, while the tech-rich Nasdaq Composite Index declined 0.12 percent to 4,024.51.