Mining shares slid 3.2 percent and banks fell 2.5 percent on concerns that the tough economic environment would hurt companies in both sectors.
At 10:29 SA time, the FTSEurofirst 300 index of top European shares was down 1.3 percent at 971.59 points after gains in the previous session, helped by a rate cut by China.
“China was a positive factor, but (US Fed Chairman Ben) Bernanke disappointed investors who were looking for some hints about a third round of quantitative easing. Disappointment can also be deducted from a correction in gold prices,” said Koen De Leus, a strategist at KBC Securities in Brussels.
While Bernanke gave few hints of further imminent monetary stimulus in comments late in European trade on Thursday and caused markets to close off their highs, while the US closed flat and many markets in Asia fell overnight, dampening sentiment in Europe in early deals on Friday.
Poor macroeconomic numbers also weighed on sentiment. Data on Friday showed German exports and imports fell sharply in April, in the latest sign that Europe's largest economy is beginning to feel the chill from the euro zone debt crisis.
Further woes came from Fitch, which slashed Spain's credit rating by three notches late on Thursday and signalled it could make further cuts as the cost of restructuring the country's troubled banking system spiralled and Greece's crisis deepened.
Spain is expected to make a request over the weekend for a financial package to prop up its troubled banks, two senior EU officials and one German source said on Friday.
CENTRAL BANKS
Some analysts said central banks would be prompted to step in during the coming months to keep the pace of economic recovery intact.
“We think the Fed will do more balancing work. Given where we are in terms of US economic growth and given the fiscal cliff coming at the start of 2013, the case for added stimulus over the course of the next few months is quite strong,” Ian Richards, head of equity strategy at Exane BNP Paribas, said.
“You have got some pretty hefty push-pull forces. We believe that over time, macro catalysts will dominate and some of the fears that have been attributed to the euro zone are likely to be addressed by politicians.”
He said valuations of some defensive sectors such as food and beverages were at an elevated level and there was a better valuation case elsewhere in the market. Investors should buy Europe's internationally exposed cyclical companies, he added.
European food and beverages sector trades at 15 times its one-year forward earnings, against 7.9 times for banks and 9.5 times for the STOXX Europe 600 index, according to Thomson Reuters Datastream.
“We're seeing excessive swings in market sentiment, from extremely pessimistic to extremely enthusiastic, and from a tactical point of view, we see good opportunities in going contrarian each time the mood becomes excessive one way or the other,” said Vincent Treulet, head of strategy at BNP Paribas Investment Partners, which has 513 billion euros ($642 billion) in assets under management.
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