US stocks have opened lower before clawing back some ground, a day after suffering their worst losses in eight months, while European shares remain subdued.
The Dow Jones index shed more than 130 points, or 0.5%, to 25,466, while the S&P 500 and Nasdaq also fell, but all three later entered positive territory.
In London, the UK’s FTSE 100 share index was down 1.2% at 7,063.
On Thursday, US President Donald Trump renewed his attacks on the Federal Reserve, which has been raising interest rates.
He told the Fox News channel the Fed’s policy was “too aggressive” and that it was “making a big mistake”.
On Wednesday, he said the Fed had “gone crazy”, prompting a response from International Monetary Fund head Christine Lagarde, who said she “would not associate” Fed chair Jerome Powell “with craziness”.
In Paris, the Cac 40 share index was down 0.8% at 5,163 points, while in Frankfurt, the Dax index fell 0.3% to 11,673.
Markets in Asia had followed US stocks, which slumped on Wednesday.
Japan’s benchmark Nikkei 225 dropped 3.9%, its steepest daily drop since March. In China, the Shanghai Composite fell 5.2% to its lowest level since 2014.
Why are the markets falling?
by Dominic O’Connell, BBC Today business presenter
For the past year, stock market experts have been predicting a big fall. It was something of an obvious forecast; most markets are at or near all-time highs, particularly in America, where investors have enjoyed the longest bull run ever.
What goes up must come down – the only question was the timing. In the last year, there have been even more signs of so-called “melt-up” phase of a bull market, where share price increases are concentrated in just a few very large companies. Apple, Facebook, Google and Amazon have accounted for most of the increase in the US markets in the past 12 months.
The trigger for the latest fall has been a sudden flight from American government debt.
Investors have started to sell down US government bonds – the IOUs it issues to fund its deficit – thinking that they are no longer a good value investment. This has in turn triggered a bout of realism on the stock market.
Worries about a trade war have added to this new mood of caution, and it is worth noting that yesterday several big US companies warned that tariffs on Chinese imports were starting to hurt their business.
One oddity of this particular market drop; traditional safe havens, like gold and, perversely, US government debt, have hardly moved in price. This suggests investors are uncertain of what next – a big fall or another rally – and are happy to sit on cash.
Trump attacks ‘crazy’ Fed
US markets have done better than expected this year, bouncing back after turmoil early in the year to set new records over the summer.
But the Federal Reserve is raising interest rates, with the latest hike coming last month, and more increases are likely to come.
The Fed last month abandoned its description of its policy as “accommodative”, reflecting a view that the economy is strong enough not to need the kind of stimulus it received in the after-math of the financial crisis.
The prospect of dwindling US stimulus has been compounded by a trade war between the world’s two largest economy – which the IMF has warned could harm growth.
US President Donald Trump has been particularly critical of the Fed’s rate rises, breaking with tradition in the US where presidents are expected to respect central bank independence.
“The Fed is making a mistake,” he told reporters on Wednesday. “I think the Fed has gone crazy.”
However, analyst Michael Hewson of CMC Markets said it was “too simplistic just to blame the Federal Reserve” for market turmoil.
“There are a number of factors,” he told the BBC. “Obviously, concerns about slowing growth – the IMF downgraded its global growth forecast for the global economy, citing emerging market concerns,” he said.
Mr Hewson added that trade tensions between China and the US had weighed on Asian markets for most of this year, while trade tensions between the US and the EU had hit European markets. Concerns about the political situation in Italy were also adding to market nervousness.
“It’s a well-overdue correction, driven by US markets, which have out-performed for most of the past two to three years,” he added.
Simon French, chief economist at Panmure Gordon, told the BBC that what was “really quite interesting is the speed with which the sell-off is taking place”, adding that there has been a pattern over the past few years of markets hitting new highs followed by sharp drops.
He added: “When you’ve got the president of the US saying some quite unpleasant things about the Federal Reserve… you don’t necessarily expect it in the US.”
“That’s made investors say ‘Given those gains, we’ll bank some of them, [and] take money off the table’.”