European Stocks Close Down after Shocking U.S. Payrolls Drop

European stocks tumbled Friday following weaker-than-expected U.S. jobs data and renewed fears of a recession in the world's biggest economy.

The London FTSE-100 ,Paris CAC-40 and Frankfurt DAX were all firmly in the red. The FTSE CNBC Global 300 was also lower.

U.S. stocks opened lower after nonfarm payroll data posted the first drop in four years, at a time when the markets were still expecting them to rise despite the turmoil in the financial markets.

The dreaded word "recession" is on the lips of more and more traders and economists who now think the Federal Reserve, which was expected to cut its funds rate by 25 basis points at a September 18 meeting, will act more aggressively to save the economy.

"The Fed will come to the rescue, it's just a question of size," Arthur Hogan, from Jefferies, told "European Closing Bell." He said the Fed should reduce its key rate by 50 basis points.

But others advanced the possibility of a 100 basis point cut, saying the Fed was not in sync with economic developments. "The American economy has been slowing for at least 18 months," Robert Nightingale from Millennium Global Investor told "European Closing Bell."

Financial Sector Hit Again

The European Central Bank, after leaving its key monetary policy rate unchanged on Thursday, signalled on Friday it was still worried by inflation. But President Jean-Claude Trichet added that more information about the market situation was needed before the tightening cycle could resume.

The financial sector took another hit, with speculation that French bank Societe Generale might issue a profit warning, sending its shares down 4.3%.

And activist investor Knight Vinke Asset Manatement set its sights on HSBC Holdings, Europe's biggest bank, asking for a review of strategy. Knight Vinke owns less than 1% of HSBC, but succeeded in prompting the restructuring of Shell. Shares of HSBC fell 1.6% with the general market sentiment.

Zurich Financial Services reassured investors it had no subprime exposure and said its bond portfolio made money in the past two months but its shares still fell 1.8% with the market.

A bright spot was BAE Systems, which is expected to sign a 20 billion pound ($40.5 billion) deal, supplying 72 Eurofighter Typhoon jets to Saudi Arabia next week, London newspaper the Times reported Friday in an unsourced report. Shares of BAE closed 1% higher.

Economists say that in the last full week of data releases ahead of the Fed's September 18 meeting, markets are likely to be volatile as investors hunt for possible clues on how big a cut they may get in U.S. interest rates.