A bout of dollar weakness prompted a sharp sell-off in the bourses with European exporters bearing the brunt of the pressure. The dollar fell below 116 yen for the first time since February 16th and the euro pushed up to its strongest levels for two months.

The FTSE Eurobloc 100 index, which covers leading companies in the euro zone, closed 16.53 or 1.5 per cent down at 1,054.85. The FTSE Eurotop 100, covering countries inside and outside of EMU, dropped 35.43 or 1.2 per cent to 2,893.07, while the broader FTSE Eurotop 300 settled 17.09 or 1.3 per cent lower at 1,262.66.

Frankfurt dropped 2 per cent as strength in the euro and Wall Street's weak start dictated a continuation of the correction which has followed the market's climb to year highs earlier in the month. The Xetra Dax index finished 104.19 lower at 5,206.44. Strength in the euro overwhelmed renewed speculation in the telecoms sector that Deutsche Telekom planned to link up with Spain's Telefonica. Deutsche Telekom lost 37 cents to €39.03.

Its rival, Mannesmann, turned back from an early €149.47 to close €1.80 lower at €143.20 after it denied that it was bidding for the British mobile phone business, One-2-One. The company did, however, confirm a report that it was expected to bid for parts of Deutsche Telekom's cable television network. Chemicals stocks were losers on concerns that their earnings could be hit by a strong euro. BASF, which said earlier in the year that it was benefiting from the weak euro, gave up 92 cents to €41.48. Hoechst tumbled €1.58 to €40.

Paris posted its seventh consecutive fall, sent into decline by weakness among banks and several industrial stocks. The CAC-40 index ended 44.54 or 1 per cent lower at 4,395.91. The three big banks involved in a complex takeover battle all tumbled on worries that no clear winner would emerge from their contest. Banque Nationale de Paris has made hostile bids for Societe Generale and Paribas in an attempt to prevent them merging.

BNP fell €3.90 or 5.2 per cent to €71.10, SocGen dropped €6.90 or 4.3 per cent to €152 and Paribas ended €5.60 or 5.5 per cent lower at €96.50. Worries about a possible US interest rate rise also depressed the sector, with Credit Commerciale de France finishing €3.80 or 3.5 per cent down at €106.20.

Zurich remained under pressure as rate fears, the crumbling dollar and a weak start on Wall Street weighed on the market. The SMI index lost 72.5 to 6,729.6, led down by a weak financials sector, as rate worries depressed stocks.