European shares sank to new 2012 lows on Wednesday in a broad-based sell-off as concern over contagion from Greece gripped investors.
The FTSEurofirst 300 index fell 0.7 percent to 991.03 , having dropped 0.7 percent on Tuesday after Greek politicians failed to put together a ruling coalition, paving the way for a new election and ramping up concern over what would happen if it leaves the euro zone.
Spain's IBEX 35 and Italy's FTSE MIB suffered respective losses 0.6 percent and 0.2 percent.
"In the grand scheme of things a Greek exit from the euro would be problematic but would represent an end game in itself… the main concern would be contagion effects to Spain and Italy and of course the potential for further losses for European banks," Darren Sinden, senior trader at Silverwind Securities, said.
"The issue here is uncertainty because we are in uncharted territory (there is no formal blueprint for euro member state to exit currency) – markets hate uncertainty because they can't price it properly."
On the back of their view that Europe's banks could manage a Greek euro zone exit, but any contagion into Italy or Spain would increase the severity of the situation considerably, Societe Generale strategists recommended sticking to UK or Nordic names while question marks remain.
In case of contagion, "we could see a funding gap of 200-400 billion euros in Italy and 140-280 billion in Spain, requiring another LTRO similar in scale to LTRO 1 and 2," they noted.
Charts pointed to more losses for the FTSEurofirst 300, with the index, in a bearish signal, having closed below the key psychological 1,000 level – also the 200-day moving average – for the first time since end-December on Tuesday.
"Until (the uncertainty) is dealt with then risk-off mode will continue. We see value in this market in (more) defensive names and have started buying into weakness," Atif Latif, director at Guardian Stockbrokers, said.
Heavyweight mining stocks led the market lower, tracking weakness in metals prices as the political crisis in Greece added to investor concerns about the global economy in the aftermath of discouraging data out of the U.S. and China.
Xstrata and commodities trader Glencore, which is bidding for Xstrata, were among the weakest as UBS cut its ratings for the pair to "neutral" from "buy", with their shares off 4 percent and 2.9 percent respectively.
In its most cautious comments yet, BHP Billiton, the world's biggest miner, said on Wednesday it expects commodity markets to cool further and that investors have lost confidence in the longer-term health of the global economy.
"In recent months, global markets have been relying on the U.S., and emerging markets such as China to deliver on the global stage, but now that they are stuttering, the ongoing euro zone issues are hitting the markets even harder," Mike McCudden, head of derivatives at Interactive Investor, said.
Highlighting these concerns, Danish shipping and oil group A.P. Moller-Maersk struck a cautious tone on the recovery in freight rates, sending shares in the group, whose Maersk Line is the world's biggest container shipping company and a barometer of global trade, down 6.4 percent.
Trading volumes in A.P. Moller-Maersk were robust, at more than two times their 90-day daily average.
