London’s benchmark FTSE 100 index dropped 0.59 percent to 5,281.08 points, as Britain prepared to announce on Tuesday that it was slashing its growth forecasts, in a spending update delivered by finance minister George Osborne.
Frankfurt’s DAX 30 shed 0.77 percent to 5,701.40 points and in Paris the CAC 40 slid 1.18 percent to 2,977.48.
The euro rose to $1.3327 from 1.3318 late in New York on Monday.
Eurozone finance ministers meet on Tuesday under urgent pressure to stop the debt crisis from shattering the monetary union.
The United States, IMF and Organisation for Economic Cooperation and Development (OECD) each issued urgent warnings in the hours leading up to the meeting that decisive action is essential to prevent global economic meltdown.
The meeting comes after US President Barack Obama told top European officials on Monday that they must act decisively to avoid plunging the world into another downturn.
“This is of huge importance to our own economy,” Obama said, after meeting European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso and EU foreign policy chief Catherine Ashton.
Asian stock markets rallied on Tuesday on optimism that Europe’s finance leaders were close to a plan to tackle debt despite a warning that the crisis could spark another depression.
Traders also reacted to a strong cue on Wall Street, which surged after a record post-Thanksgiving shopping weekend.
Tokyo jumped 2.30 percent and Seoul surged 2.27 percent.
European stocks and the euro had rebounded sharply on Monday after days of sustained heavy losses, with investors snapping up bargains despite a welter of what would normally be bad news. Paris had closed up 5.46 percent.
A weekend report that Italy was to get an International Monetary Fund bailout – later flatly denied by Rome – had been taken positively by traders.
Dealers overlooked a warning from the OECD that the eurozone debt crisis could plunge advanced economies into deep recession and even depression.
“With a strong start to the week, it’s heartening to believe that some investors feel the markets are undervalued and ripe for the picking,” said Owen Ireland, a broker at Valbury Capital.
“Unfortunately, sensitivity to the continued Europe situation could mean that any gains are short lived with the possibility of sellers coming out of the woodwork … to take some short-term profits.
“Ultimately, if we want to see any stability in the equity markets, investors will need to be convinced that European policy makers have complete control over the most crucial aspects of the union’s worst problems,” he added.