European markets ended sharply lower Tuesday, tracking U.S. stocks, which were dragged down by weak retail sales and an announcement by Citigroup of a bigger-than-expected fourth-quarter loss of $9.83 billion.
Figures from the Commerce Department showed that U.S. retail sales unexpectedly fell in December, implying costlier energy and slumping housing prices were taking a toll on consumers and reigniting fears of a recession.
The European retail sector was gloomy as well, after the largest UK retailer Tesco reported holiday sales figures below market expectations and other companies in the sector reiterated caution about sales expectations this year.
"The outlook for markets is all linked to whether we are in a mid-cycle slowown or global recession and the problem is that the two of them look very, very similar at the start but have
different market consequences," said Andrew Lynch, European fund manager at Schroders.
"Investors are looking and hoping for evidence that the problems in banks are over but the key thing to watch out for is also what banks say about commercial property lending."
Bank stocks were lower after earnings from Citigroup revealed a writedown of $18.1 billion, due to exposure to subprime mortgages.
In Europe, struggling mortgage lender Northern Rockheld a shareholder meeting to determine the fate of the bank, with activist investors looking to have more say in a possible private sale of the bank.
All the board members were re-elected at the meeting, and shareholders also approved a proposal to limit the board's ability to allot shares with a nominal value of more than 5 million pounds without the consent of shareholders in a general meeting.
Shares of Northern Rock fell close lower by 16.1 percent on concerns that resolutions restricting the board could lead to a nationalization of the ocmapny.
Britain's biggest retailer, Tesco, announced a 3.1 percent rise in underlying sales for the six weeks ended Jan. 5. Analysts' forecasts ranged from 3.5 percent to 4.5 percent and shares lost 3.1 percent.
The company's finance and strategy director Andrew Higginson said a 50 basis point interest-rate cut is needed after this holiday season's slowdown in consumer spending.
Staying in the UK retail sector, Debenhamsreported a 2.2 percent increase in underlying sales, helped by online shopping and a strong demand for designer clothes. But shares -- which climbed nearly 13 percent Monday on anticipation of strong results -- dropped 16.7 percent after the company said it may need to cut prices if competition increased.
And shares of luxury goods maker Burberry sank 16.4 percent after the company said sales for its fiscal third quarter was "modestly behind" its plan.
Shares in Danish headset and hearing aid maker GN Store Nord slumped 24.4 percent after it issued a profit warning for last yearon lower-than-expected growth at its ReSound and Netcom units.
In European economic news, Germany's ZEW business sentiment index for January slumped to a 15-year low of -41.6 from 37.2 in December. Economists predicted a smaller drop to -40.
And UK consumer inflation rose 2.1 percent in December, the same as the month before.
-- Reuters contributed to this report