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Bears back as Europe stalls on debt

DOMESTIC shares suffered their largest fall in more than four weeks as renewed concerns over Europe's ability to manage its debt crisis and signs of a slowing Chinese economy sliced more than 2 per cent from the local market.

DOMESTIC shares suffered their largest fall in more than four weeks as renewed concerns over Europe's ability to manage its debt crisis and signs of a slowing Chinese economy sliced more than 2 per cent from the local market.

Rising investor optimism of the past week that Europe was tackling its financial problems came to a grinding halt yesterday as German politicians dampened hopes of an imminent announcement of a comprehensive package to recapitalise the region's banks and a plan to boost the firepower of an all-important stabilisation fund.

At the close on Tuesday, the benchmark S&P/ASX 200 Index was down 88.5 points, or 2.07 per cent, while the broader All Ordinaries Index was 2.04 per cent weaker at 4249.5. The Australian dollar also dropped US1? lower in the local session, weighed down by Europe concerns. Last night it was trading at US102.04?, down from US103.07? on Monday.

The falls come as today marks the anniversary of the 1987 Black Monday crash when sharemarkets around the world nosedived. At the time, Wall Street lost nearly a quarter of its value.

While a significant announcement is still due at the weekend European Union leaders' summit in Brussels, German officials suggested more work will be needed to bring an end to the euro zone crisis.

German Chancellor Angela Merkel's office knocked down what it called "dreams" that the last word in taming the crisis will be reached in an October 23 summit.

And in a sign of continuing crisis, ratings agency Moody's warned France in a report on Monday it might place a negative outlook on its AAA credit rating in the coming months, because the nation's financial strength had weakened.

Australian sharemarket losses accelerated as official figures released from China showed its massive economy pulled back from fast growth in the third quarter.

China's economy grew at an annual pace of 9.1 per cent in the quarter, down from 9.5 per cent in the previous three months, coming slightly below consensus forecasts as measures to rein in inflation appear to be taking hold. Despite the slowdown, analysts said China was on track for a soft landing rather than a shock.

Prior to the release of the figures, a warning on Monday night from high-profile hedge fund manager Jim Chanos in New York that China was heading for a hard economic landing also weighed on globalmarkets.

Commonwealth Bank of Australia credit market analyst Alex Stanley said the relative optimism that has returned to markets in recent weeks has been undercut by "setback and disappointment" in Europe. "The fiscal problems in Europe are structural and there are implementation risks facing any new crisis policies."

In local trade, resource stocks were the hardest stocks hit. Banks and financials were also sold off heavily.

Details Page 13

smh.com.au Follow the twists and turns of the trading day with the Markets Live blog, starting at 9.45am on smh.com.au/business


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