LONDON, Dec 12: European share prices slumped on Wednesday, following Wall Street into the red on fears that the latest cut to US interest rates may not be big enough to avoid a US recession, dealers said.

They noted that while the US central bank’s decision to trim its key federal funds interest rate by 25 basis points to 4.25 percent was in line with market expectations, some investors had been hoping for a more aggressive cut.

The market reacted with disappointment to the Fed’s decision to only cut the discount rate by 25 basis points rather than 50 basis points, Calyon analyst Sebastien Barbe said.

Judging by the reaction in the equity market and the return of risk aversion, the fear would seem to be that the Fed is ... underestimating the true threat of a recession.In late morning trade, London’s FTSE 100 index of leading companies showed a loss of 0.87 per cent to 6,480.00 points. Frankfurt’s DAX 30 slid 0.54 per cent to 7,966.13 points and in Paris the CAC 40 shed 1.29 per cent to 5,651.07.

True, the risk of a recession is high, 35-40 per cent in our opinion, but the (Fed’s) accompanying statement made it clear that the door is open to future easing, Barbe added.

Asian equity markets recovered some of their losses in late trade as investors took the view that the initial sell-off was excessive.

Tokyo ended down 0.70 per cent, Hong Kong shed 2.41 percent, Shanghai lost 1.54 per cent and Sydney fell 1.0 per cent.

It seems that investors want the Fed to solve all the ills of the US economy with one shot,” said Benjamin Collett, head of hedge fund sales trading at Daiwa Securities Co in Hong Kong.

The US housing woes have triggered multi-billion-dollar losses for major banks that snapped up mortgage-backed securities during a housing boom.

With the rate cut out of the way, investors moved to lock in some of those recent gains amid jitters that the fallout from the US subprime loan crisis has yet to fully run its course.

CommSec chief equities economist Craig James said investors would get over the apparent “shock” of the Fed’s smaller-than-expected rate cut.—AFP