Eurozone equities slid on Friday after Brussels slammed Rome over its 2019 budget plans, with sentiment hurt also by weak Chinese growth data, poor French corporate news and rising global interest rates, dealers said.
Milan's stock market was down 0.8% in afternoon deals after the European Commission formally warned Italy late on Thursday that its budget plans for 2019 are a serious concern, demanding "clarifications" over Rome's unprecedented deviation from EU rules.
Paris shed 0.7% on weak outlooks from telecoms group Bouygues and tyre maker Michelin, and Frankfurt fell 0.2%. London however gained 0.3% on upbeat state borrowing data.
The euro rose against the dollar, which was down also versus sterling.
"Italy is headed for a showdown with Brussels and I am not sure they have have much to lose," Manulife equities head David Hussey told AFP.
"Given how damaging Brexit is to the EU project, a loss of Italy would be devastating and to be avoided at all costs - hence I think (that) Italy's hand is quite strong."
However, Italy is facing higher borrower costs as investors sell off its bonds. In the secondary market, the yield on 10-year government reached 3.726%, its highest rate since 2014.
Italy's populist government has submitted its draft 2019 budget to the European Commission in which it laid out plans to increase spending and end the austerity policies of recent years, despite deficit warnings.
Italy's deficit is now projected at 2.4% of GDP, far higher that the 0.8% estimate given by the earlier centre right government.
Brussels says Rome needs to cut the deficit in order to begin reducing its massive debt, which exceeds 130% of annual economic output - way above the EU's 60% ceiling.
Asian stock markets traded mixed on Friday, with Shanghai bouncing back from early losses despite data showing Chinese economic growth slowed to its weakest level in nine years.
The world's second largest economy expanded 6.5% on-year in July-September, National Bureau of Statistics figures showed, as a campaign to tackle mounting debt took their toll - alongside trade frictions with the US.
The growth figure was in line with an AFP survey but marked the worst performance since the start of 2009.
Shanghai equities nevertheless finished the week with a rally after a rare joint intervention by some of China's top financial officials.
However the pronounced slowdown weighed on markets elsewhere because China is a crucial driver of global economic growth.
"The Chinese economy is slowing - but that's down to a deleveraging process and concerns about trade and a global slowdown, as interest rates rise," CMC Markets analyst Michael Hewson said.
"We are seeing amber lights flashing, but that's all," he noted.
Investors have been rocked by a series of problems in recent months including rising US interest rates, geopolitical tensions and the China-US trade conflict.
"Markets are reacting finally to rising interest rates and a whole host of other bad news that is circulating," added Hussey at Manulife.
"Many investors have not experienced a rising rate cycle and will find it hard to adapt."
Investors fret over rising borrowing costs because they impact on loan repayments for both businesses and individuals - and affect consumers' disposable incomes.
Oil prices rebounded after Thursday's sharp losses caused by a surprise jump in US energy stockpiles.