LONDON May 23 European equities went into a tailspin early on Thursday, spooked by concerns the U.S. Federal Reserve could soon taper its stimulus programme and compounded by weak economic data from China.
By 0703 GMT, the FTSEurofirst 300 was down 20.75 points, or 1.7 percent, at 1,235.53, having closed at its highest level since mid-June 2008 in the previous session, boosted by investors hunting for yield in a low interest rate environment.
The index, however, fell sharply on Thursday after Fed chairman Ben Bernanke appeared to contradict his prepared statement to Congress in a live question and answer session late on Wednesday by saying the central bank could scale back the pace of bond purchases at one of the next few meetings.
Investors fear that if economic support in the U.S is withdrawn before Europe has managed to establish stable growth, fragile confidence will be shattered, potentially sending the economy into recession.
"The volatile response of equity indices to Fed Chairman Bernanke's testimony underlines the challenges the Fed faces in communicating its policy intentions," Ian Williams, equity strategist at Peel Hunt, said.
"Investors should not over-react to every shifting nuance when Fed officials speak. U.S. monetary policy was data dependent before the testimony and remains so," he said, adding the falls were more likely profit taking than the start of a correction.
Adding to the strain on equities, HSBC's preliminary survey of purchasing managers showed China's factory activity shrank for the first time in seven months in May.