Equities on both sides of the Atlantic dropped after the latest US jobless data fuelled expectations the Federal Reserve will announce plans to begin cutting back its bond-buying program at its meeting next month.
Initial claims for unemployment benefits dropped 15,000 last week to a seasonally adjusted 320,000, the lowest level since October 2007, according to the Labor Department. It was well below the 335,000 economists had predicted.
In late afternoon trading in New York, the Dow Jones Industrial Average sank 1.36 per cent, the Standard & Poor's 500 Index dropped 1.34 per cent, while the Nasdaq Composite Index retreated 1.61 per cent.
In Europe, the Stoxx 600 Index finished the session with a 1.1 per cent decline from the previous close. France's CAC 40 fell 0.5 per cent, while Germany's DAX lost 0.7 per cent and the UK's FTSE 100 Index gave up 1.6 per cent.
"We got a fantastic jobless claims figure, which really should be a boost to the markets but instead it's having the opposite effect," Craig Erlam, a market analyst at Alpari UK in London, told Bloomberg News. "Tapering is really at the forefront of everyone's minds."
US Treasuries also fell, pushing yields on 10-year notes as high as 2.82 per cent, the highest in two years. The greenback weakened as well, sliding 0.6 per cent against the euro and 0.8 per cent against the yen.
In July, American employers added 162,000 jobs, pushing the unemployment rate down to 7.4 per cent, the lowest level in more than four years.
"The critical component is going to be the August jobs report," Carl Riccadonna, a senior economist at Deutsche Bank Securities in New York, told Reuters. "If that comes in at least where it was in July, then this is going to keep the Fed on track to initiate tapering at the September meeting."
Separate reports today showed that the consumer price index rose 0.2 per cent in July, after a 0.5 per cent increase in June, while home builder confidence advanced to 59 in August, the highest level since 2005, from a revised 56 in July.
Shares of Cisco plunged, last down 7 per cent, leading the decline in the Dow, followed by a 4.5 per cent drop in shares of Hewlett-Packard.
Cisco said it would axe 4,000 jobs as the company predicted revenue that fell short of estimates.
Shares of Wal-Mart fell, last down 2.8 per cent, after the world's largest retailer downgraded its full-year profit forecast.
Oil prices rose, pushing Brent to the highest level in four months, boosted by concern about the deteriorating situation in Egypt. Gold surged 2 per cent in response to the drop in the S&P 500.