LONDON Shares in major European economies suffered their biggest quarterly loss in nine years, hit by concerns the global economy was slipping into recession and the euro zone debt crisis was deepening with Greece facing possible default.
The steep sell-off this quarter, wiping $1.2 trillion off European share values, was sparked by an intensification in the euro zone sovereign debt crisis and concerns the United States could be heading for a recession.
U.S. and German government bonds, however, were in demand as investors sought shelter in safe-haven assets.
Karen Olney of UBS said European stock valuations may be cheap but investors would remain cautious until euro zone politicians can come up with a decisive plan to finally put to rest the bloc's debt crisis, now threatening Italy and Spain, its third and fourth largest economies.
"Politicians tend to react better when the markets are falling than rising. If we don't get a solution imminently, we could have another leg down," said Olney, head of European thematic research at UBS.
"In a rising market, they are not going to come up with a grand slam plan. If the markets are suffering again, they may be pushed to come up with a solution that we need. This is why some people consider Europe difficult to invest in, almost uninvestable at the moment."
Among the worst to suffer in the recent sell-off was Germany's DAX .GDAXI which had outperformed all other European markets in the first half of the year.
The German blue-chip index, home to conglomerate Siemens (SIEGn.DE) and automakers Daimler (DAIGn.DE) and BMW (BMWG.DE), lost 25.4 percent in July-September, its worst quarterly performance since the third quarter of 2002.
France's CAC 40 .FCHI, and Spain's IBEX 35 .IBEX also posted their biggest three-month fall since the third quarter of 2002, despite their regulators, along with those from Italy and Belgium, banning short selling of financial stocks starting on August 12.
The CAC 40 fell 25.1 percent in July-September, with French bank Societe Generale (SOGN.PA) losing 51 percent over the same period -- its biggest quarterly loss ever.
The IBEX 35 index, meanwhile, was off 17.5 percent, while Italy's FTSE MIB .FTMIB was down 26.5 percent.
Britain's FTSE 100 .FTSE was down 13.7 percent, faring better than other major European markets but still posting its worst three-month performance in nine years.
That compared with a 17.1 percent fall over the same period for the pan-regional STOXX Europe 600 index, which was its biggest quarterly loss since the fourth quarter of 2008 after the global economy was sent into a tailspin following the collapse of Lehman Brothers.
In terms of valuations, the DAX and the CAC 40 carried a 12-month forward price-to-earnings ratio of 8 and 7.7 respectively, slightly cheaper than the FTSE 100's 8.8 and the U.S. S&P 500's .SPX 10.9, data from Thomson Reuters Datastream showed.
"You don't get a sustainable rally until either the growth outlook improves or you get substantial progress on the sovereign debt crisis. In the absence of either of those things, investors should remain cautious and defensive positioned," said Ronan Carr, European equity strategist at Morgan Stanley.
Morgan Stanley was "overweight" telecoms .SXKP and healthcare .SXDP, and "underweight" banks .SX7P and industrials .SXNP.
However, RBS analysts said both the DAX and the FTSE 100 looked hard done by, based on their index composition, with German auto stocks and UK oil stocks among the most attractive on a relative value basis.
(Graphic by Scott Barber; Editing by Mike Nesbit and David Cowell)