European stocks have fallen sharply today, led by a 4.5 per cent slump in the UK's FTSE 100 on fears that other central banks will not copy the US and cut interest rates.
Safe-haven government bonds and the yen, which tends to rise as investors pare risky trades, gained ground, while commodities including oil sagged on nagging fears that demand will be hurt by slower global growth.
"The recovery in risk appetite after the Fed cut was only temporary," said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.
"After digesting the news, markets have come to the conclusion that it will not resolve problems in the US economy and this is weighing on the carry trade, supporting funding currencies like the yen."
The Federal Reserve on Tuesday slashed its key federal funds rate by 75 basis points - the largest cut in more than 23 years - to 3.50 per cent a week ahead of its scheduled meeting, underscoring the risks facing the US economy.
After rising as much as 1.6 per cent, the FTSEurofirst 300 index of top European shares reversed direction to be down 3.5 per cent with Germany's DAX falling 2.7 per cent.
The French CAC index was down over 4 per cent. After spending much of the morning in positive territory the Dublin market has also fallen and at 2pm was down just over 1.2 per cent at 6414. The main banking stocks were all trading between 2 and 3.5 per cent lower.
Investors believe more needs to be done by the Fed to shore up the US economy, which some see on the brink of recession, hit by a slumping housing market and tight credit conditions. Markets have priced in a further 50 basis point rate cut at next week's Fed meeting.
This followed a 2 percent rebound for Japan's benchmark Nikkei and a 4.5 per cent rally for MSCI's measure of other Asian stock markets.
Commodities looked vulnerable with copper down slightly on the London Metal Exchange, while US crude fell about $1 to $88.24 a barrel.
"The Fed's move implied that the problems in the system are much worse than we expected," said Eugen Weinberg at Commerzbank in Germany.
The MSCI world equity index wiped out almost all of the gains made earlier to be flat. It was still off a near 15-month trough plumbed a day earlier and down nearly 13 per cent this year.
Suggesting a weak opening for Wall Street, US stock futures were all lower.
Agencies