LONDON, June 20: European stocks fell on Tuesday, mirroring slides in Japan and on Wall Street, as fears of higher U.S. interest rates continued to drive the markets while the yen rallied after the Bank of Japan gave its strongest indication yet that it might raise rates.

I suppose Treasuries were supported by the NAHB last night at an 11-year low, so given how important housing is in the US economy that gave Treasuries a bit of a bid,” said a London-based trader.

Tough talk on inflation from the Fed has consolidated expectations for a US rate hike next week to 5.25 per cent while also fuelling bets that the bank could raise rates at least one more time to fight off price pressures.

The European Central Bank has also banged the drum on inflation in recent days, showing there is room for more rate rises. This saw euro zone government bond futures rising as they also benefited from stock market weakness.

Speculation that the Japanese central bank could raise rates from near zero for the first time in six years increased after BOJ Governor Toshihiko Fukui said policy decisions should be taken “early” if warranted by economic conditions.

The market reacted particularly to the 'early' bit, and the overall tone suggests the BOJ's stance remains hawkish, said Tatsuo Ichikawa, chief JGB strategist at ABN AMRO Securities.

It keeps market expectations alive for a July or August rate hike. The dollar was down at 115 yen after hitting eight-week highs of 115.77 yen on Monday.

The euro fell 0.6 per cent to 144.47 yen after hitting 145.86 on Monday, its strongest since the single currency was launched in 1999.

The euro was up at $1.2566, off a seven-week low around $1.2530 set last week.

The pan-European FTSEurofirst 300 Index of leading shares was down 0.26 per cent at 1,265 points as the prospect of higher interest rates bit.

Across Europe, Britain's FTSE 100 fell 0.29 per cent while Germany's DAX and France's CAC 40 both dipped 0.3 per cent.

Prices for gold drifted higher, but copper remained weak, trading around $6,850 a ton.

—Reuters