Doubts Prevail as Efforts to Spur Economy Falter

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LONDON -- Markets across Europe dived and then regained some ground, ending lower Monday as worries about recession grew into concern that governments can't do much to solve one.

Banks in Germany and Sweden tapped government funding, among other measures to bolster their funds, and several governments took steps to try to reassure investors about their economies.

U.K. Prime Minister Gordon Brown reiterated that his government will increase borrowing in the short term to help the U.K. economy through the downturn. French President Nicolas Sarkozy, concerned about the prospect of rising unemployment, is expected to lay out Tuesday a series of measures designed to relieve the effects of higher unemployment, including steps to make it easier for workers who have been laid off to find jobs, according to an official at the French Ministry of Economy and Finance.

Stocks in London, Frankfurt and Paris dropped as much as 5% in the minutes after trading opened Monday morning, as investors reacted to steep falls in Asia. But they recovered in the afternoon, swayed in part by a better-than-expected opening in the U.S., coupled with a strong signal from the European Central Bank that it is likely to cut its key interest rate at a meeting next week.

The declines in the market are about "the translation of what has been a financial crisis into the real economy through lower economic data and corporate profits," said Nick Nelson, European equity strategist at UBS AG.

The pan-European Dow Jones Stoxx 600 index closed down 1.9% at 195.04, marking its lowest end-of-day level since May 2003. The U.K. FTSE 100 index ended down 0.8%, the French CAC-40 index fell 4%, and the German DAX index rose 0.9%.

The gloom is likely to pile political pressure on governments to produce fiscal-stimulus plans to support their economies. German Chancellor Angela Merkel's cabinet is preparing plans to help households and firms with measures that include making health-insurance contributions tax deductible and strengthening tax incentives to buy fuel-efficient cars. The package, which could be announced in November, could be worth about €20 billion, or roughly $25 billion, to recipients. That would be less than 1% of Germany's economy, "but not insignificant," says Alexander Koch, an economist at Unicredit in Munich.

Data released Monday showed that business confidence in Germany, Europe's largest economy, hit its lowest level in October since May 2003, when the country suffered its last recession, according to a survey from the German Ifo Institute.

German officials have complained that the country's banks aren't taking advantage of bailout funding the government has made available, with only three public-sector lenders signaling interest so far. Monday, Germany's largest retail bank, Deutsche Postbank AG, said it would get €1 billion in capital from its parent, Deutsche Post AG. The bank posted a large third-quarter loss, sending its shares down 22% Monday.

Car maker BMW AG said it has stopped production at its Leipzig plant this week, as it prepares to produce 25,000 fewer cars than expected this year. At rival Daimler AG, management-board member Günther Fleig told reporters on Monday that production would stop for several weeks at two or more major German plants around Christmas, extending the usual holiday.

In Sweden, investment bank Carnegie AB Monday said it has been granted a one billion Swedish kronor ($126 million) loan by Sweden's central bank to manage liquidity problems it has suffered as a result of the financial crisis.

And shares in Belgian banking and insurance company KBC Group fell 0.9% after it confirmed that it will boost its capital by selling €3.5 billion of securities to the Belgian government.

In Europe's emerging economies, the International Monetary Fund agreed on a rescue package for an undisclosed amount to Hungary.

Hungary's main index, the BUX, dropped 9.8% on the news. The IMF has also agreed to offer $16.5 billion to Ukraine.

People across Europe are feeling the effects of the credit crisis. In the U.K., Alison Nash, manager of the Dorothy House Hospice charity shop in Corsham, an affluent town west of London, is seeing an increase in business as more middle-class women come in to buy their clothes secondhand. A year ago, when she began working there, her clientele was lower-income families, she says.

"People are beginning to feel the credit crunch a little bit more now," Ms. Nash said.

The cost of buying protection for credit increased, as shown by spreads on European credit-derivative indexes. The Markit iTraxx Europe index, which measures the cost of default insurance on 125 investment-grade European corporate borrowers, stood at about 1.84 percentage points, compared with a closing level Friday of 1.7 percentage points.

—Sebastian Moffett in Paris and Clare Connaghan and Natasha Brereton in London contributed to this article.
Write to Alistair MacDonald at alistair.macdonald@wsj.com and Marcus Walker at