Top European shares fell to their lowest level in almost a month on Thursday as a jump in the euro and a spike in bond yields cast a shadow on borrowing costs and export prospects for companies in the region.
The European Central Bank's insistence on Wednesday that there was no need to adjust monetary policy in the face of volatility rattled financial markets. German Bund yields hit their highest in eight months and the euro eyed its biggest two-day gains in over six years.
The FTSEurofirst 300 index was down 1.6 percent at 1,545.35 points at 0923 GMT, hitting its lowest level since May 7. A close below 1,519 would be the lowest since February.
The index rallied nearly 25 percent between mid-January and mid-April as the announcement of a bond-buying programme by the ECB knocked the single currency and lowered borrowing costs for European governments and companies, as well as boosting equities' attraction by lowering returns on bonds.
But over the past month the index has been at its most volatile since 2012, based on the size of the moves between its open, high, low and close.
"The pick-up in the bond yields is putting pressure on the European stock markets," said Mirabaud Securities' senior equity sales trader John Plassard.
Utilities, which had been seen as a natural replacement for bond investments due to their reliable dividend and higher yield versus bonds, were hit hardest, falling 2.2 percent.
Greece's benchmark ATG equity index fell 2.4 percent as talks over the country's debt problems continued. Prime Minister Alexis Tsipras emerged from late-night talks with senior EU officials in Brussels saying a deal with creditors was "within sight", but differences remain.
"Clearly there remains some way to go in the talks so I refuse to get too optimistic. The messages coming from the talks are extremely mixed and even the creditors can't agree on a consistent stance," said OANDA senior market analyst Craig Erlam.
THE BEST VALUE
Swiss agrochemicals group Syngenta outperformed to rise 1.5 percent after Reuters reported that German company BASF was considering a bid.
Corporate takeover activity, as evidenced in the possible bid battle for Syngenta, has provided a cushion for European stock markets this year, in spite of worries over Greece.
In addition, some investors saw rising yields, a reflection of rising inflation expectations, as a sign the euro zone economy was recovering, pointing to a favourable backdrop for stocks.
Research by JP Morgan Asset Management research showed there is a historically positive correlation between rising bond yields and positive equity returns when rates are moving up from a low base.
"Equities represent the best value and should continue to offer an attractive and growing income when compared to bonds, even if bond yields start to rise," Stephen Thornber, manager of the St. James's Place strategic managed fund, said.