Political, Economic Turmoil Slam European Markets

European stock market losses deepened Monday as investors grappled with increasing political turmoil around region and a series of grim economic reports suggesting a return to recession for the world's second-largest trading zone.

The broadest measure of European share price performance, the FTSE Eurofirst 300, slumped more than 2.2 percent in early dealing to trade at 1,022.22 by 12:20 GMT, the lowest level since 16 January.

The single currency drifted around 0.5 percent against the dollar in early trading to change hands at a four-day low of $1.3126

Europe took another step towards recession Monday after a reading of the region's major economies indicated a deeper than expected slowdown in April while investors debated the implications of potential new governments both France and the Netherlands.

The Markit Purchasing Managers' Index for the eurozone showed measures of both the manufacturing and services portion of the region's economy fell below 50 for the month of April, a figure generally associated with a contracting economy. The composite reading was measured at 47.4 while breakout figures for manufacturing (46) and services (47.9) showed broad-based weakness in the world's second-largest trading bloc.

In France, the April services PMI was measured at 46.4, a six-month low and nearly four points weaker than the March reading. The manufacturing PMI reading was slightly better than the previous month, coming in 0.5 points better at 47.3, but still firmly below 50. Germany's April PMI figures were also published Monday, with manufacturing activity in Europe's largest economy sliding to 46.3, a 33-month low, according to Markit. The services portion of the survey registered 52.6.

Francois Hollande's narrow victory in the first round of France's Presidential elections has European investors in a cautious mood Monday as signs that the region's second-largest economy is in danger of sliding into recession.

Social Party leader Francois Hollande won a narrow win over incumbent Nicolas Sarkozy in the first round of France's Presidential elections. M. Hollande too 28.6 percent of the vote against at 27.1 percent tally for M. Sarkozy. Both men will advance to a final round of voting on 6 May.

Shares on the benchmark CAC-40 shed 2.2 percent in the opening hour of trading, hitting 3,121.05, while 10-year bond yield rose three basis points to trade at 3.12 percent. A basis point is 0.01 percent . Germay's DAX gave up 3 perent to trade at 6,548.2 while Spain's IBEX slid 2.7 percent to 6,849.9.

The extra yield, or spread, investors demand to hold France'e government bonds instead of German Bunds rose to 144 basis points, within touching distance of the 2012 high. Credit default swap contracts on France debt rose 5 basis points to trade at 205 basis points. This means an investor would need to pay $20,500 each year for five years to insure $10m in French government bonds against default.

The Bank of Spain said Monday the economy shrank 0.4 percent in the first quarter of this year, confirming a slip back into recession. Eurostat, the European statistics agency, also repoted that Spain's deficit hit 8.5 percent - more than four times the EU minimum - during 2011. Spain' benchmark 10-year bond yields were trading at 6.02 percent following the figures.

Further political developments were also affecting markets in the Netherlands, where Prime Minister Mark Rutte resigned his cabinet, according to Dutch broadcast media reports, following his failure to reach an agreement on his coalition government's budget. Geert Wilder's Freedom Party pulled its support for the Liberal Party's efforts to meet EU targets on deficit reduction over the weekend. Elections could come as early as September.

Credit default swap prices for Dutch government debt - current rated triple-A - rose 13 basis points to 132 basis points - within five basis points of a record high. The spread against German bunds rose 11 basis points to 72 basis points. The benchmark index of Dutch share performance, the AEX, fell more than 2.8 percent to 300.74 in the morning session, the lowest level since December of last year.