A fall on Wall Street dampened the European share markets' millennium party.

In the initial euphoria that greeted a bug-free millennium most of the major European markets soared to record highs in early trading yesterday but were forced to give up these gains after a slump on Wall Street.

Trading in Dublin and London is expected to open nervously today as signs of rising inflation and an interest rate rise in the US could once more overshadow the markets.

The Dow Jones Index closed at 11,356.89 last night, down 140.23, amid growing belief that the US Federal Reserve might raise rates at its next meeting in February.

European stock markets initially celebrated their reopening with hopes that investors would return to the market after the holiday period.

Another encouragement was the German finance ministry announcement that it was considering lowering the tax on share earnings of private investors as part of its large-scale fiscal reforms to take effect in 2001.

On Wall Street, though, investors quickly turned their attention to economic data in the belief that the absence of the Y2K bug would clear the way for the US Federal Reserve policymakers to raise US interest rates at its meeting on February 2nd.

This triggered profit-taking in the US which quickly spread to Europe and reversed the new year rally.

Germany's DAX index fell 2.98 per cent, to close at 6,750.76 (-207.38), and the CAC-40 in Paris ended down 0.69 per cent to finish at 5,917.37 (-40.95) after earlier setting a record high of 6,102.12. Blue-chip indices in Milan and Madrid also closed lower.

Technology stocks rose despite the decline in the US as the industry's reputation remained intact following few millennium bug hiccups so far.

Insurance and financial stocks turned weaker, weighed by bond prices falling on strong European economic data that fuelled inflation and interest rate fears. Share prices in the pharmaceuticals, energy, and food and beverage sectors also fell.

In Hong Kong share prices closed out the first session of the New Year at an all-time high, rising 2.4 per cent on the back of a booming technology sector. The Hang Seng Index rose 407.53 points to 17,369.63, up from a record high of 16,962.10.

In the US the focus was on economic data. Within an hour of opening, new data showed continued economic strength, the benchmark 30-year treasury bond's yield neared 6.6 per cent and a bearish note from Morgan Stanley's Dean Witter's US investment strategist, Mr Byron Wien, combined to turn the market upside-down.

Meanwhile, the US National Association of Purchasing Management's manufacturing activity index for December stood at 55.5 versus an expected 56.1 and 56.2 in November. A figure above 50 indicates the US manufacturing sector is expanding and copperfastened investor concerns, according to analysts.

"I think the message here is that it is very difficult to argue that the US economy is not doing very, very well," said Mr Arthur Hogan, the chief market analyst at Jefferies & Co. In addition, the prices-paid portion of the index, a carefully monitored gauge of inflation, rose to 65.7 from 65.3 in November.

Markets are already looking forward to the Federal Reserve's next meeting, which could opt to raise interest rates again if it determines the economy is growing too fast to support extended growth.

--(Additional reporting by Reuters)