Stocks fell and the euro weakened Wednesday after Standard & Poor's hit some of the world's leading banks with a credit downgrade and euro zone leaders' move to ramp up the regional bailout fund drew a tepid response.
Weighing further on the single currency, the head of Italy's market authority said there was a real risk of euro breakup if the European Central Bank's role in fighting the two-year-old crisis remains unchanged, Reuters reported.
Driving early moves in stocks, however, was the S&P rating cut on 15 big U.S. and European banks after the U.S. close -- including Barclays, UBS and HSBC -- as part of a review of its criteria, and which could raise funding costs for some.
The FTSEurofirst 300 <.FTEU3> index of leading European shares was down 0.6 percent at 942.16 points by 0822 GMT, snapping a three-session rally that itself had followed a near 8 percent fall over the preceding two weeks.
Yesterday's downgrades by S&P on a number of banks in both Europe and the U.S. has rocked sentiment in equity markets, Terry Pratt, trader at IG Markets, told Reuters.
This move has essentially overshadowed the progress that had been made in Brussels with regard to leveraging the EFSF bailout fund.
U.S. stock index futures for the Standard & Poor's 500 <.SPX> and Dow Jones industrial average <.DJI> were both down more than 0.4 percent at 0823 GMT, while the MSCI world equity index <.MIWD00000PUS> was down 0.3 percent.
Asian stocks also fell sharply overnight, with China's benchmark posting its biggest 1-day fall since Aug. 8 on concerns about growth in the world's second-largest economy.
By 3:23 a.m. ET, the euro was 0.3 percent lower against the dollar, while the latter firmed 0.3 percent against a basket of major currencies <.DXY>.
The fresh bout of risk aversion in stocks and weakness in the euro sparked renewed interest in benchmark German Bunds and other safe-haven trades and by 0823 GMT, Bund futures were up 23 ticks, or 0.2 percent.
Late on Tuesday, euro zone finance ministers agreed to increase the firepower of the region's bailout fund, the EFSF, but did not say by how much and may look to the International Monetary Fund for more help.
I think that's the only way that the EFSF has to increase its capacity, to ask for money from other investors outside the euro, said Alessandro Giansanti, strategist at ING.
Italy has talked to the IMF about extra financial support to cope with the crisis but no decision has been taken, several sources close to the situation said.
Among leading commodities, U.S. crude oil was down 0.5 percent by 0818 GMT, while European benchmark Brent was 0.4 percent weaker.
(Additional reporting by Atul Prakash and Ana Nicolaci da Costa, Kirsten Donovan and Anirban Nag; editing by Stephen Nisbet)