Worries over China's economic growth weighed on markets Monday, but an indication that Greece was making headway in convincing private creditors to accept a crucial bond swap helped European stocks clamber off earlier lows.
Investors are increasingly fearful that China's economy is coming off the boil. Over the past few years, a booming Chinese economy has helped shore up the global economy in the wake of a banking crisis, the deepest recession since World War II and rising concerns over the debt problems afflicting a number of countries that use the euro.
On Monday, China's premier Wen Jiabao lowered the economy's growth target to 7.5 percent from the 8 percent it has stood at for years as he outlined plans to boost domestic consumption and to maintain a "prudent" monetary policy.
Analysts said the forecast downgrade was in line with recent pronouncements and did not necessarily mean that China would not be growing by more than 8 percent anyway.
"Actual growth rates typically exceed official targets by a considerable margin, and this does not alter our forecast for 8.4 percent growth in 2012," said Elsa Lignos, an analyst at RBC Capital Markets.
For much of the day, worries that Greece's bond swap may not be going according to plan had kept sentiment in check.
However, some relief was provided when the Institute of International Finance, the group representing private creditors in talks with Greece, said a dozen banks, insurers and investment funds holding Greece's bonds will participate in the swap. Greece needs a sizable majority of creditors accepting the bond swap or else it faces defaulting on its debts, which could trigger turmoil in financial markets.
The investors that have promised to participate in the plan include German insurer Allianz, French bank BNP Paribas, Germany's Commerzbank and Deutsche Bank, as well as Greece's Eurobank EFG and National Bank of Greece, the IIF said. The banking group did not say how much Greek debt these institutions hold.
Greece's bondholders are being offered new bonds worth 53.5 percent in their face value, and which have a longer maturity and lower interest rate. The bond swap deal is one condition of Greece getting a second, euro130 billion ($173 billion) bailout from other eurozone countries and the International Monetary Fund.
Athens has passed into law so-called collective action clauses that would force holdouts to take the deal, but at least 66 percent of Greece's bondholders have to agree to the deal in the first place.
The statement from the IIF prompted a modest improvement in market sentiment as did more upbeat U.S. economic data _ the Institute for Supply Management said its index of non-manufacturing activity rose to 57.3, from January's 56.8. The markets had been expecting a modest decline. Any reading above 50 indicates expansion.
In Europe, Germany's DAX closed down 0.8 percent at 6,866.46 while the CAC-40 in France fell 0.4 percent to 3,487.54. The FTSE 100 index of leading British shares ended 0.6 percent lower at 5,874.82.
On Wall Street, the Dow Jones industrial average was down 0.5 percent at 12,915 while the broader Standard & Poor's 500 index fell 0.6 percent to 1,361.
The rest of the week will see a high level of interest in the release of U.S. economic data culminating with Friday's nonfarm payrolls figures, which often set the market tone for a week or two after their release.
"Overall it feels as if the market will continue to mark time ahead of Friday's numbers, with everything else providing only a fleeting distraction that will be easily forgotten as traders continue to weigh their options in advance of the figures," said Chris Beauchamp, market analyst at IG Index.
Russian shares were among the only to rise in Europe on Monday, with the Micex rising 1.1 percent, as investors took the election of Vladimir Putin as president as a sign of continuing stability. In the longer term, however, analysts say Putin will have to deliver on promises to modernize the economy, reduce corruption and address the grievances of a growing base of political opposition.
Earlier in Asia, Japan's Nikkei 225 index fell 0.8 percent to 9,698.59 and South Korea's Kospi dropped 0.9 percent to 2,016.06. Hong Kong's Hang Seng lost 1.4 percent to 21,265.31. Mainland Chinese shares were mixed, with the Shanghai Composite Index closed down 0.6 percent to 2,445 and the smaller Shenzhen Composite Index marginally higher at 981.20.
Waning hopes over China's growth knocked oil prices, too _ benchmark oil was down 34 cents at $106.36 per barrel in electronic trading on the New York Mercantile Exchange. Oil prices remain elevated though, partly because of tensions over Iran's nuclear ambitions, and have become an increasing drag on stocks over the past couple of weeks.
Pamela Sampson in Bangkok contributed to this report.