European stocks hit a one-month low and the yen and government bonds rose on Wednesday after disappointing U.S. earnings results fanned concerns that the U.S. mortgage sector's malaise may hurt the broader economy.

U.S. stocks suffered their worst one-day performance since March on Tuesday after DuPont and Countrywide Financial Corp posted a slump in profits, citing the housing downturn.

Investors worry housing troubles will dampen corporate activity further, retrench consumer spending and hit the world's largest economy -- which in turn could affect Asia and Europe which are enjoying robust growth.

Recent deterioration in credit markets from the fallout in high-risk U.S. subprime mortgages means firms are facing higher financing costs. This could dry up the stream of M&A deals which have fuelled world stocks to lifetime peaks only last week.

Weakness in the credit market and concerns about the problems in the U.S. housing market are starting to affect equities. There's risk aversion among investors, said Elwin de Groot, senior market economist at Rabobank in Utrecht.

If the U.S. economy were to fall into a more significant slowdown, that will hurt demand for European production of goods and services.

The FTSEurofirst 300 index was down 0.8 percent, moving further away from its 6-1/2 year high set this month. The recent strength of the euro is also weighing on sentiment.

The MSCI world equity index was down 0.4 percent, having touched a record high last week. Tokyo stocks hit a six-week low while Asian shares ex-Japan fell 0.4 percent.

Chinese shares defied broader selling pressure and ended up 2.7 percent, buoyed by investor anticipation of upbeat corporate earnings there.


European credit markets, having tumbled in the past few sessions, improved slightly, with the iTraxx Crossover index tightening to 362 basis points.

But the recent repricing of low credit spreads has pushed up financing costs for firms. On Tuesday, a $3.5 billion bank loan financing for the buyout of a General Motors' unit was postponed -- the largest leveraged loan to be pushed back this year.

There were also signs companies outside the United States are starting to be affected. Nomura Holdings, Japan's largest brokerage, said it may pull out of the U.S. subprime mortgage business after its U.S. operations had booked a pre-tax losses in the second quarter.

The dollar dipped below 120 yen for the first time in 2-1/2 months as investors bought back the Japanese currency they sold to fund purchases of high-yielding currencies.

But the impact on the dollar elsewhere was more mixed as it managed to rise against European currencies.

Rising risk aversion can underpin the dollar as U.S.-based investors repatriate their funds and foreign capital diverts to U.S. Treasuries.

Euro zone government bonds drew safe-haven bid, with the September Bund future up 24 ticks.

Oil prices fell for a fourth day with London Brent crude down 0.7 percent. Forecasts of higher U.S. refinery production are easing supply concerns during peak summer demand.

Gold was off the previous day's 11-week high at $678.00 an ounce.