Any respite felt in the market at the start of the week was short-lived, with European stocks retreating yesterday for the third time in four sessions.
The catalyst was again the US, with European markets taking a turn for the worse as a disappointing outlook from retail giant Wal-Mart Stores fuelled worries that trouble in the housing market is hitting consumer spending.
Even an appeal from European Central Bank (ECB) president Jean-Claude Trichet for investors to "keep their composure" failed to avert the sell-off.
The pan-European FTSEurofirst 300 index closed down 1.2 per cent, reversing some of Monday's gains and bringing the loss over the past month to almost 9 per cent. The index is now up just 0.8 per cent on the year.
"I think it's too early to call the end of this period of extreme volatility and encourage clients to be buying too aggressively at these levels," said Philippe Gijsels, senior equity strategist at Fortis Bank in Brussels.
"The problems in the subprime market may resurface, and other banks could come out with bad news, and it will be very easy to get the sell-off started again."
Other commentators were in agreement, with one Dublin trader saying it was anyone's guess as to which direction the market would move in today.
European shares dropped sharply at the end of last week, hit by worries that problems in the US subprime market - that is institutions that lend to those with poor credit histories - were spreading to the wider financial arena.
Yesterday, Swiss bank UBS warned that the market turmoil was likely to hit its investment banking business in the second half of the year, saying that if turbulent conditions prevailed throughout the third quarter, it would probably see "a very weak trading result in the investment bank".
In its earnings update yesterday, Wal-Mart blamed pressure from the housing market for its disappointing profit outlook and Home Depot reported its first quarterly sales decline in more than four years, citing a slowdown in the housing sector.
Mr Trichet struck a defiant note, saying the ongoing volatility in financial markets represented to some extent a "normalisation" of pricing risk.
"We see increased volatility in many markets and a significant re-appreciation of risks," he said, adding that the ECB was paying close attention to the markets.
Earlier, the ECB had added extra funds to the markets for a fourth day, but its intervention was on a smaller scale, as central banks slowly pulled out extra cash pumped in to avert panic about a credit squeeze.
In the UK the FTSE 100 lost 1.2 per cent, while France's CAC 40 was down 1.6 per cent. In Germany, the DAX held up slightly better, slipping 0.7 per cent.
Closer to home, the Iseq index of Irish shares lost just over 1 per cent, wiping out half of the €2 billion it gained on Monday. - (Additional reporting: Reuters)
