Shares fall on eurozone debt and world economy fears

US and European shares have both fallen as concerns continue about the high level of eurozone debt, as well as the risk of a return to recession on both sides of the Atlantic.

Wall Street's Dow Jones index closed down 1.1%, while France's Cac fell 1.1% and Germany's Dax closed 1% lower.

In London, the FTSE 100 index bucked the trend, rising 1.1%.

Banking stocks again notched up the biggest declines amid fears over their exposure to eurozone national debt.

Meanwhile the troubled euro, which has been falling in recent days, received a temporary boost after Switzerland announced it was pegging the Swiss franc to the euro in an attempt to weaken its currency.

The franc has been strengthening in response to the recent financial turmoil in the eurozone, as some investors consider it a relatively safe currency.

The euro rose 2 cents against the dollar to $1.4286 after the announcement, and from 87.5p to 88.2p against sterling, although it later fell back against both currencies.

Economy fears

The global stock market turmoil comes in reaction to a continuing series of bad economic figures from the US and Europe.

In the US, data out last week showed that no new jobs were added to the US economy in August.

To make matters worse, the White House warned that the unemployment rate in the US was likely to stay at about 9% till the end of 2012.

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Media captionWorld Bank President Robert Zoellick: "Decision time is coming"

President Barack Obama is scheduled to deliver a key speech on 8 September to outline his much-anticipated jobs creation plan.

In Europe, figures on Monday by research group Markit showed that service sector activity in the UK fell by its largest amount in more than 10 years in August, while business confidence in the eurozone fell at its fastest rate last month since the 2008 collapse of Lehman Brothers.

The eurozone economy grew 0.2% in April to July, compared with the first quarter, the European Union's statistics agency confirmed on Tuesday.

However, it added that compared with the second quarter of last year, growth was revised down to 1.6% from its earlier estimate of 1.7%.

In Germany, the eurozone's strongest economy, separate data showed that industrial orders declined by 2.8% in July.

While domestic orders remained strong, adding 3.6%, foreign orders slumped 7.4%.

'European disease'

A core concern over the high levels of government debt in the eurozone is how they will affect the banking sector.

Greece is continuing with plans to ask banks and other private holders of its government bonds to swap them for others that pay a lower rate of interest over a longer period.

The fear is that other nations, such as Spain and Italy, may ultimately be forced to follow the Greek lead.

On Monday, Deutsche Bank's outgoing chief executive, Josef Ackermann, said that some European banks would go bust if they were forced to recognise in their accounts the existing losses on government debts they own, based on current market prices for government bonds.

European banking stocks fell again on Tuesday, with France's Societe Generale down 6.5%, BNP Paribas down 5.2% and Credit Agricole 4.7% lower.

Germany's Commerzbank fell 3.4%, and in London RBS dropped 2.8% and Barclays shed 2.2%.

"It's the European disease that is infecting markets all around the world at the moment," said Michael Heffernan of Austock Group.

Commentators say the markets are also concerned about whether European politicians are really getting to grips with the debt problem.

World Bank President Robert Zoellick told the BBC that eurozone leaders had to do more than simply continue to bail out struggling member states.

He said: "Particularly in the case of the eurozone, we are now at a point where the muddling-through policies of providing additional finance and liquidity will not be sufficient to deal with the fundamental choices that Europe has to make.

"Europe now faces a key change of whether it has a fiscal union or to change the nature of the eurozone. Decision time is coming."

'Apoplectic frenzy'

US markets analyst Peter Kenny of Knight Capital said Wall Street remained unconvinced that the eurozone could sort out its problems.

"We have a eurozone that is an apoplectic frenzy of just trying to right the ship," he said.

"If you can find some stabilising influence in the eurozone to give the global markets some confidence, I'd be shocked."

The German and French parliaments are now debating the extent of their countries' contribution to the European Financial Stability Facility, the fund set up to bail out any eurozone nations struggling with their debt obligations.

German Finance Minister Wolfgang Schaeuble was also due to meet his Finnish counterpart to try to break an impasse that is delaying Greece's second bailout fund.

This has been caused by continuing demands by the Finnish government that Greece should pay it collateral in exchange for its contribution.

Germany has also warned that Greece is in danger of missing out on its next tranche of bailout money if it does not meet its economic targets.

Reports in Greece suggest that the country only has enough cash in its reserves to last until the end of the month.

Issues 'interlinked'

Richard Jeffrey, chief investment officer at Cazenove Capital Management, told BBC Radio 5 live's Wake Up To Money that the key worry for the markets was the health of the world economy.

"If the world economy is slowing down or perhaps even moving into recession - I think that is less likely, but that is what people fear - then that has negative implications for the financial system and the banking sector," he said.

"The debt problems in the peripheral European economies rumble on, of course, but again their debt problems are helped if there is growth.

"If there isn't growth in the economies, then their debt problems become more difficult to support, so this is all interlinked."