Volkswacht Bodensee - Stocks drop as jumbo Swedish rate hike fans Fed fears

The Swedish central bank sprang its biggest rise in three decades, ramping up its policy rate by a full percentage point to 1.75 percent.

The news sent the region's markets into reverse as tighter global borrowing costs bear down on economic activity.

Frankfurt equities ended the day down 1.0 percent as news of rocketing German producer prices further fanned inflation fears, and the government appeared close to nationalising the energy company Uniper, which has been brought low by the spike in gas prices.

London fell after reopening following the funeral of Queen Elizabeth II on Monday.

The US dollar rose against rivals as the Fed's almost certain interest rate hike approached, while oil prices slid.

Wall Street's main stocks indices fell, with the Dow down 1.1 percent in late morning trading.

- 'Nerves jangling again' -

"European stocks rallied at the open -- but a jumbo rate hike from Sweden's central bank sent the nerves jangling again as investors worry about what's in store from global central banks," Markets.com analyst Neil Wilson told AFP.

The Fed's decision has been the main focus for the markets after figures last week showed consumer prices are still rising at a pace not seen since the early 1980s.

With Fed officials vowing to hike rates sufficiently to bring inflation down, expectations were strengthened that it will raise its key interest rate by another 0.75 percentage points on Wednesday.

Some observers now speculate over a possible one-percentage-point move.

On Thursday, the Bank of England (BoE) is predicted to deliver another sizeable increase in British borrowing costs.

"The (Swedish) hike underlined just how serious central banks are taking the inflation threat and with 75 basis point hikes from the Bank of England and Federal Reserve looking like slam-dunk certainties, the early optimism in the markets quickly evaporated," added Wilson.

"The reality of central bank tightening... is keeping a lid on stocks and will continue to act as a headwind for risk."

Sentiment on Wall Street was also dampened by data showing a drop in housing construction permits, although housing starts increased 12.2 percent month-on-month in August.

"The key takeaway from the report is that the weakness in the permits data suggests the strength in starts is not sustainable, especially when also taking into account that mortgage rates have risen since the July-August period," said analyst Patrick O'Hare at Briefing.com.

Asian markets meanwhile enjoyed a much-needed bounce Tuesday, tracking Wall Street's late Monday rally.

Elsewhere on Tuesday, the British pound remained under pressure, even as the BoE lines up another rate hike, after sliding on Friday to a 1985 low at $1.1351.

Oil prices continued their march lower.

"A strong US dollar, rising yields and concerns over demand as the global economy slows is weighing on crude oil prices again," said market analyst Michael Hewson at CMC Markets.

- Key figures at around 1530 GMT -

New York - Dow: DOWN 1.1 percent at 30,690.39 points

EURO STOXX 50: DOWN 0.9 percent at 3,467.09

London - FTSE 100: DOWN 0.6 percent at 7,192.66 (close)

Frankfurt - DAX: DOWN 1.0 percent at 12,670.83 (close)

Paris - CAC 40: DOWN 1.4 percent at 5,979.47 (close)

Tokyo - Nikkei 225: UP 0.4 percent at 27,688.42 (close)

Hong Kong - Hang Seng Index: UP 1.2 percent at 18,781.42 (close)

Shanghai - Composite: UP 0.2 percent at 3,122.41 (close)

Euro/dollar: DOWN at $0.9987 from $1.0024 on Monday

Dollar/yen: UP at 143.74 yen from 143.21 yen

Pound/dollar: DOWN at $1.1415 from $1.1431

Euro/pound: DOWN at 87.57 pence from 87.70 pence

Brent North Sea crude: DOWN 1.4 percent at $90.74 per barrel

West Texas Intermediate: DOWN 1.6 percent at $84.04 per barrel

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I.Meyer--BTB