The European Central Bank (ECB) has cut interest rates back to 1%, as European Union leaders prepare for a crunch meeting in Brussels designed to rescue the eurozone.
While markets had been hoping for some tightening of monetary policy, they reacted negatively to comments made by the bank's president, Mario Draghi.
Draghi said that the bank's buying of government bonds is "not infinite" and was used for the transmission of monetary policy, not for supporting those countries indefinitely. Markets seem to have interpreted his remarks as an indication that the bank is not preparing to turn on the printing presses to capitalise bailout funds for the eurozone after Friday's EU summit, a key expectation of investors.
Near to the close, the French CAC-40 had given back nearly 2.6% and the German DAX had shed 1.9%. In the UK, the FTSE-100 was down 0.79%.
It is hoped the rate cut, which is the second in as many months, will act as a stimulus by freeing up money that might otherwise be saved and reduce the impact of a likely recession in the eurozone.
However, with the threat of a total break-up of the single currency still hanging over the continent, investors were watching Draghi's press conference closely for signs that he might be on the verge of ending his resistance to quantitative easing.
"The ECB has stated it wants a properly functioning monetary system and financial markets. It has backed this up with its second consecutive rate cut and further announcements around loosening the criteria for collateral it accepts for lending to the banking sector," James Butterfill, an equity strategist at Coutts said.
"But in order to see more aggressive bond purchases to help resolve the debt crisis, the ECB needs to see concrete evidence of a movement toward closer fiscal union. This latest EU leaders’ summit could make significant progress in that direction, but it is unlikely to deliver a silver bullet that will once and for all stop the euro-zone crisis in its tracks."
Speaking at a press conference, Draghi said that inflation was likely to stay above 2% for several months, adding that the outlook remains bad, with "high uncertainty and downside risks".
Draghi also said that the ECB would make three-year emergency loans available to struggling banks. More details are to follow later this afternoon.
Earlier, the Bank of England announced that it was holding interest rates at 0.50%, a record low that the bank has maintained for nearly three years.