European debt fears plague world markets again

(AP) — European and U.S. stock markets fell sharply again Friday despite a surprise improvement in the U.S. unemployment rate, as investors fretted about the debt crisis enveloping Europe after Portugal's lawmakers defeated the government over its deficit reduction plan.

In Europe, the FTSE 100 index of leading British shares closed down 78.39 points, or 1.5 percent, at 5,060.90, while Germany's DAX slid 98.90 points, or 1.8 percent, to 5,434.34. The CAC-40 in France plunged 125.49 points, or 3.4 percent, to 3,615.55.

On Wall Street, the Dow Jones industrial average was down 70.43 points, or 0.7 percent, at 9,931.75 around midday New York time while the broader Standard & Poor's 500 index fell 6.78 points, or 0.6 percent, to 1,056.33.

Some stability emerged in the markets — at least the selling tide was stemmed — by the news that the U.S. unemployment rate dropped unexpectedly in January to 9.7 percent from 10 percent even as employers shed 20,000 jobs helped shore up investor confidence about the pace of the U.S. recovery.

The drop in the U.S. unemployment rate came as a welcome relief to markets battered over the last couple of days by mounting worries about the debt crisis afflicting Europe.

However, that relief proved short-lived.

"The stock market's fairly indifferent reaction to the labour market data suggests that the overarching mood remains one of caution," said John Higgins, an analyst at Capital Economics.

"On a different day, a significant drop in the unemployment rate might have been expected to elicit a more positive response, especially after what has been a fairly tough few weeks," he added.

The news that the opposition parties defeated the Portuguese government's austerity plan provided another reminder, if any were needed, that European countries will find it extremely difficult to get a grip on their public finances. Instead, the opposition parties passed their own bill that lets the country's regions rack up even more debt.

Already, investors have severe doubts that Greece's new government can deliver the cuts it has promised. The Greek plan, which has been cautiously backed by the European Commission and the European Central Bank, is to get the budget deficit down from around 12.7 percent of the country's gross domestic product in 2009 to below 3 percent in 2012.

But with strikes looming — customs and tax officials have already begun a 48 hour strike in protest at the planned austerity measures — investors remain skeptical at best.

"It has been a worry for Greece for weeks but it is now spreading like wildfire, driving equity markets lower, causing further concerns both about medium-term growth prospects and in currency markets," said Kit Juckes, chief economist at ECU Group.

Unsurprisingly, those concerns have dogged the stock markets in Greece, Portugal and Spain all week. Greece's main composite index was down another 3.7 percent, while Portugal's PSI was 1.4 percent lower while Spain's IBEX fell 1 percent.

All this uncertainty is hitting the euro hard as investors think a bailout of the periphery countries is becoming more likely by the European Union. There are even fears over the very future of the eurozone itself.

The euro fell below $1.36 for the first time since May last year, trading at $1.3595 late afternoon London time — the single currency has been undermined by concerns about credit problems in its peripheral members ever since the issue reared its ugly head in November, while the dollar has attracted support through its supposed safe haven status during times of risk aversion.

Commodity and energy prices have also been hit hard by the meltdown in risk assets — benchmark crude for March delivery was down a further 19 cents at $72.95 a barrel in electronic trading on the New York Mercantile Exchange after losing $3.84 Thursday.

Earlier in Asia, stock markets responded to the massive falls recorded in the previous session in Europe and the U.S., where the Dow Jones industrial average slid 2.6 percent, its worst performance in nine months.

Japan's benchmark Nikkei 225 sank 2.9 percent, or 298.89 points, to 10,057.09, while China's Shanghai Composite Index fell 1.9 percent, or 55.91, to 2,939.40. Hong Kong's Hang Seng buckled 3.3 percent to 19,665.08.

Elsewhere, South Korea's Kospi slid 3.1 percent to 1,567.12, Taiwan's market dived 4.3 percent and Australia's S&P/ASX benchmark dropped 2.3 percent.

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AP Business Writer Joe McDonald in Beijing contributed to this report.