San Francisco Frontiers - Stock markets drop on jumbo Swedish rate hike

The Swedish central bank sprang the biggest rise in three decades, ramping up its rate by a full percentage point to 1.75 percent.

The news sent the region's markets into reverse as tighter global borrowing costs bear down on economic activity.

Frankfurt equities dropped about 0.8 percent as news of rocketing German producer prices further fanned inflation fears.

London fell after reopening following the funeral of Queen Elizabeth II on Monday.

The euro dipped against main rivals after Monday's surge, while oil prices slid on the stronger dollar.

Wall Street's main stocks indices all fell by 0.8 percent as trading got underway.

- 'Nerves jangling again' -

"European stocks rallied at the open -- but a jumbo rate hike from Sweden's central bank sent the nerves jangling again as investors worry about what's in store from global central banks," Markets.com analyst Neil Wilson told AFP.

The Fed's decision is the main markets focus after figures last week showed consumer prices are still rising at a pace not seen since the early 1980s.

The US Federal Reserve is forecast Wednesday to hike its key interest rate by another 0.75 percentage points.

Some observers have even speculated over a possible one-percentage-point move.

One day later, the Bank of England (BoE) is predicted to deliver another sizeable increase in British borrowing costs.

"The (Swedish) hike underlined just how serious central banks are taking the inflation threat and with 75 basis point hikes from the Bank of England and Federal Reserve looking like slam-dunk certainties, the early optimism in the markets quickly evaporated," added Wilson.

"The reality of central bank tightening... is keeping a lid on stocks and will continue to act as a headwind for risk."

Sentiment on Wall Street was also dampened by data showing drop in housing construction permits, although housing starts increased 12.2 percent month-on-month in August.

"The key takeaway from the report is that the weakness in the permits data suggests the strength in starts is not sustainable, especially when also taking into account that mortgage rates have risen since the July-August period," said analyst Patrick O'Hare at Briefing.com.

Asian markets meanwhile enjoyed a much-needed bounce Tuesday, tracking Wall Street's late rally as investors gird themselves for another big Fed hike, though fears of a recession remain elevated.

Elsewhere on Tuesday, the British pound remained under pressure, even as the BoE lines up another rate hike, after sliding on Friday to a 1985 low at $1.1351.

- Key figures at around 1330 GMT -

London - FTSE 100: DOWN 0.4 percent at 7,207.87 points

Frankfurt - DAX: DOWN 0.8 percent at 12,696.14

Paris - CAC 40: DOWN 1.2 percent at 5,991.86

EURO STOXX 50: DOWN 0.8 percent at 3,470.70

New York - Dow: DOWN 0.8 percent at 30,775.29

Tokyo - Nikkei 225: UP 0.4 percent at 27,688.42 (close)

Hong Kong - Hang Seng Index: UP 1.2 percent at 18,781.42 (close)

Shanghai - Composite: UP 0.2 percent at 3,122.41 (close)

Euro/dollar: DOWN at $0.9960 from $1.0024 on Monday

Dollar/yen: UP at 143.85 yen from 143.21 yen

Pound/dollar: UP at $1.1384 from $1.1431

Euro/pound: DOWN at 87.51 pence from 87.70 pence

Brent North Sea crude: DOWN 0.6 percent at $91.46 per barrel

West Texas Intermediate: UP 0.8 percent at $84.64 per barrel

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I.Wright--SFF