European stocks fell after a German warning against undue enthusiasm that an EU summit this weekend will produce a quick solution to the euro zone debt crisis snuffed out an early rally.
Europe's main equity markets had opened strongly on Monday in the wake of strong finishes across the Asia-Pacific region, but by mid-afternoon had dropped into negative territory.
The euro, which had rallied in the morning to above $US1.39 for the first time in a month, also fell back after sobering comments from Germany.
At close of trade, Frankfurt's DAX 30 was down 1.81 per cent to 5859.43 points, London's benchmark FTSE 100 index had lost 0.54 per cent to 5436.70 points, and in Paris the CAC 40 dropped 1.61 per cent to 3166.06 points.
Milan closed down 2.30 per cent and Madrid dropped 1.24 per cent.
The euro reached an intra-day high of $US1.3914, before tumbling to $US1.3763. That was down from $US1.3881 in New York on Friday. The US dollar fell to 76.77 yen from 77.21 yen on Friday.
Gold stood at $US1.682 an ounce, up from $US1.678 on Friday.
The German comments also hit sentiment on Wall Street. In midday trading the Dow Jones Industrial Average was down 1.43 per cent to 11,478.13 points.
The broader S&P 500 fell 1.39 per cent to 1207.57 points and the tech-heavy Nasdaq dropped 1.54 per cent to 2626.70 points.
"Pressure this morning comes as many market participants continue to take their cues from Europe's major bourses, which have faltered in recent action," said analysts at Briefing.com.
Germany sought to dampen expectations for Sunday's European Union summit in Brussels, with government spokesman Stefan Seibert warning that "dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled."
Finance Minister Wolfgang Schaeuble said that decisions would be part of "important measures to be taken over the long term, and this long term is likely to last into next year".
The tone was a marked change from the weekend when, speaking after a meeting of G20 finance ministers and central bankers in Paris, French Finance Minister Francois Baroin said the eurozone answers at the summit would be "decisive".
But EU Commission President Jose Manuel Barroso said decisions this weekend must be decisive and unanimous.
The G20 finance chiefs had welcomed Europe's voiced determination though making it clear still more needed to be done.
US Treasury Secretary Tim Geithner warned that the plan must include measures to ensure that European governments could borrow at sustainable interest rates, a broad recapitalisation of banks, and further support for debt-laden Greece.
Reducing Greece's debt to a more sustainable level is emerging as a key element to resolve the euro zone crisis.
After boosting their European Financial Stability Facility (EFSF) bailout fund to 440 billion euros ($600 billion), eurozone leaders are studying ways to leverage its assets up to 2.5 trillion euros.
Macquarie Private Wealth investment adviser John Milroy said: "I think the move toward a plan that's credible and deliverable is what the market is focusing on and the time frame has really been tightened up with the EU summit this weekend now expected to agree on a plan."
Markets also digested major takeover news. US gas pipeline and energy storage giant Kinder Morgan on Sunday announced a deal to buy rival El Paso Corp for about $US38 billion.
And on Monday, Norway's Statoil announced the purchase of US oil company Brigham Exploration for $US4.7 billion.
The purchase will give the Norwegian energy giant access to shale oil fields in the Bakken and Three Forks formations in the states of North Dakota and Montana - among the largest oil accumulations in the United States.
British security group G4S meanwhile said it had agreed to buy Denmark-based facilities company ISS for STG5.2 billion, creating the world's largest security and facilities group.
AFP