LONDON: European stocks retreated Tuesday as Sweden's jumbo interest rate hike, aimed at tackling inflation, stoked expectations of more increases this week from the US Federal Reserve and the Bank of England.
The Swedish central bank sprang the biggest rise in three decades, ramping up its rate by a full percentage point to 1.75 percent, reports AFP.
Frankfurt and Paris equities also dropped about one percent as news of rocketing German producer prices further fanned inflation fears.
London fell after reopening following funeral of Queen Elizabeth II on Monday.
The euro dipped against main rivals after Monday's surge, while oil price gains were capped by the stronger dollar.
"European stocks rallied at the open -- but a jumbo rate hike from Sweden's central bank sent the nerves jangling again as investors worry about what's in store from global central banks," Markets.com analyst Neil Wilson told AFP.
The US Federal Reserve is forecast Wednesday to hike its key interest rate by another 0.75 percentage points.
"The (Swedish) hike underlined just how serious central banks are taking the inflation threat and with 75 basis point hikes from the Bank of England and Federal Reserve looking like slam-dunk certainties, the early optimism in the markets quickly evaporated," added Wilson
"The reality of central bank tightening... is keeping a lid on stocks and will continue to act as a headwind for risk."
Asian markets meanwhile enjoyed a much-needed bounce Tuesday, tracking Wall Street's late rally as investors gird themselves for another big Fed hike, though fears of a recession remain elevated.
The Fed's decision is the main markets focus after figures last week showed consumer prices are still rising at a pace not seen since the early 1980s.
Some observers have even speculated over a possible one-percentage-point move.
Elsewhere on Tuesday, the British pound remained under pressure, even as the BoE lines up another rate hike, after sliding on Friday to a 1985 low at $1.1351.