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Investor sentiment was jolted by news from the ADP payrolls firm that private employers only added 38 000 jobs during the month. That was far lower than the 175 000 expected in the markets, reinforcing fears that the US economic recovery is quickly running out of steam and that Friday's official government jobs data may come in lower than anticipated.
A weak manufacturing report from the Institute for Supply Management did little to help matters and US stocks suffered one of their worst days in months as investors worried that the US economy was slowing faster than expected.
"Yesterday's miserable economic news led to fears that the US 'soft patch' might be something more serious," said Robert Ryan, an analyst at BNP Paribas.
In Europe, where indexes had already fallen the day before, the FTSE 100 index of leading British shares was down another 0.9% at 5 878 while Germany's DAX fell 1.2% at 3 918. The CAC-40 in France was 1.2% lower at 3 917.
Wall Street was poised for a very modest recovery at the open - Dow futures were up 0.1% at 12 286 while the broader Standard & Poor's 500 futures rose a similar rate to 1 314.
At the start of each month, investors have a slew of US economic indicators to digest, in particular the monthly nonfarm payrolls data, which often set the tone in markets for a week or two after their release. Thursday's economic news offering is more modest, with weekly jobless claims likely to take the limelight ahead of Friday's payrolls figures.
Further weighing on stock market sentiment Thursday was another downgrade of Greece's debt from Moody's Investor Services.
The downgrade pushed the country's credit rating deeper into junk status just as Greece is trying to wrap up negotiations for a vital fifth installment of international bailout loans.
Moody's downgraded Greece by three notches from a B1 rating to Caa1 with a negative outlook on Wednesday and said the country's risk of default stood at 50% given uncertain growth prospects and increasingly difficult policy challenges.
Despite the constant stream of worries over Greece's debts, the euro has managed to recover somewhat this week, partly on the expectation that the country will get a second bailout to see it through 2013. By late morning London time, it was up 0.6% at $1.4430, just shy of its earlier three-week high of $1.4458.
However, with Europe's debt crisis flaring up time and time again - not just in Greece, but in Ireland and Portugal, too - a number of analysts think the currency will soon start to falter.
"The growing likelihood of a default event in Greece and the knock on implications for the other peripheral nations makes us think that the recent healthy rally should be viewed as no more than an opportunity to reduce exposure further to the troubled region," said Simon Derrick, senior currency strategist at Bank of New York Mellon.
Earlier in Asia, much of the attention centered on developments in Tokyo, where the country's Prime Minister Naoto Kan faced a no-confidence motion over his handling of Japan's triple disasters.
Though he won the vote, analysts said his victory could prove short-lived - Kan said he is willing to resign once the country's recovery kicks in.
Kan has been criticized for delays in construction of temporary housing for evacuees from the March 11 disaster, lack of transparency about evacuation information, and a perceived lack of leadership.
Japan's Nikkei 225 fell 1.7% to 9 555.04, as the leadership crisis hurt investor confidence.
Stock markets all over the region ended up lower, mostly because of Wednesday's dramatic declines on Wall Street.
South Korea's Kospi index ended down 1.3% at 2 114.20 while Australia's S&P/ASX 200 index shed 2.2% to 4 683.20.
Hong Kong's Hang Seng index fell 1.6% to 23 253.80, while mainland China's benchmark Shanghai Composite Index sank 1.4% to 2 705.18. The Shenzhen Composite Index of China's smaller, second exchange lost 1.5% to 1 105.95.In the oil markets, a barrel of crude continued to oscillate in a fairly narrow range above and below $100. Benchmark oil for July delivery was down 46 cents to $99.82 a barrel in electronic trading on the New York Mercantile Exchange.
