London - Financial markets grew increasingly downbeat Wednesday as investors fretted over the partial shutdown of the US government.
Even Italy's stock market gave up ground despite widespread relief over the Italian government's victory in a confidence vote.
The political upheavals in Washington D.C. and Rome have been the main focus in the financial markets this week.
While the gridlock in the US capital was showing few signs of resolution on the second day of the partial shutdown, the developments in Italy pointed to a crisis averted.
“Investors are having a little rethink over the implications and longevity of the US government shutdown,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.
In Europe, the FTSE 100 index of leading shares was down 0.6 percent at 6.419 while Germany's DAX fell 1.1 percent to 8,596.
The CAC-40 in France was 1.3 percent lower at 4,144.
In the US, the Dow Jones industrial average was down 0.8 percent at 15,066 while the broader S&P 500 index fell 0.7 percent at 1,683.
One market that bucked the trend for most of the day was Italy's FTSE MIB, which briefly hit a two-year high.
The gains came after Silvio Berlusconi threw his support behind the government of Premier Enrico Letta in a confidence vote, acknowledging defeat on the Senate floor after defections in his party robbed him of the backing he needed to bring down the government.
Investors breathed a sigh of relief knowing that Italy averted a new election and the government can go ahead with its economic reform program.
Milan's FTSE MIB was up 0.2 percent at 18,028.
Earlier, it had traded at a two-year high of 18,340, before mounting concerns over the US budget gridlock dented sentiment.
Although most analysts said they expect the US budget stalemate to be resolved before the shutdown inflicts damage on the US economy, the latest stalemate has raised concerns over whether Congress will be able to increase the country's debt ceiling later this month.
If it doesn't, the US would face a potential default, a development that could inflict massive damage on the global economy.
“The probability that the government goes right up to the wire on the debt ceiling, thus causing some destabilisation in equity markets, is higher than we previously thought,” said Dan Greenhaus, chief global strategist at BTIG. “We had said we were starting to get nervous. If this continues, nervousness will have to give way to fright.”
The dollar was also under pressure from the budget deadlock.
It was further hampered against the euro by a suggestion from European Central Bank President Mario Draghi that the bank is willing to use “all available instruments” to keep market interest rates from rising and hurting a fledgling recovery.
The euro was up 0.5 percent at $1.3585 and not far off its year high of $1.3638.
The dollar was 0.8 percent lower at 97.21 yen.
Earlier in Asia, markets were solid following the previous day's relatively strong showing in US markets. Hong Kong's Hang Seng rose 0.6 percent to 22,984.48 while South Korea's Kospi rose marginally to 1,999.47.
Markets in mainland China were closed for a public holiday.
However, Japan's Nikkei 225 index plummeted 2.2 percent to close at 14,170.49 after the government announced Tuesday it would go ahead with a sales tax increase in April.
The tax, intended to offset the country's soaring public debt, will rise from 5 percent to 8 percent. - Sapa-AP