European stocks dive after Tokyo plunge EUROPEAN stock markets have slumped in early trading, with most indices losing more than 2.0 per cent after Tokyo shares plunged owing to weak Chinese data and signs that the US Federal Reserve may soon taper off massive stimulus measures, analysts say. London's benchmark FTSE 100 index on Thursday retreated 1.74 per cent to 6,720.88 points, Frankfurt's DAX 30 slumped 2.33 per cent to 8,332.05 points and in Paris the CAC 40 shed 2.20 per cent to 3,961.97. The Madrid market gave up 2.11 per cent, Milan slid 2.65 per cent and Stockholm dived 2.33 per cent. European markets were pulling back sharply after recent record and multi-year highs for some indices on the back of improving world economic data despite ongoing eurozone strains and some still weak numbers out of the United States and China. Tokyo's main index ended down more than seven per cent on Thursday as investors took profits also after strong recent gains. Other Asian indices slumped, with markets taking their lead from Wall Street, where stocks fell overnight after Federal Reserve chief Ben Bernanke told congress that the US central bank could scale back stimulus measures soon if economic conditions improved. "Fed chairman Ben Bernanke's much anticipated testimony ... certainly initiated the volatility" on stock markets, said Spreadex trader Max Cohen. He added that while share prices initially rose after Bernanke spoke of a need to be cautious when winding down stimulus, sentiment changed when the Fed chief suggested that the US central bank's massive bond purchases could be scaled back in the next few policy meetings. "To heap further bad news on the markets, China's manufacturing output unexpectedly contracted resulting in the yen strengthening," Cohen said. The Tokyo market has gained in recent weeks from a weakening yen, which lifts demand for Japanese goods abroad, boosting the profits of exporting companies. Meanwhile the slump in global share prices came also after HSBC said manufacturing activity in China contracted in May for the first time in seven months in another sign of the weakness of the recovery. US stock markets had ended lower on Wednesday following a choppy day of trading as the market weighed exit signals on the Federal Reserve's exceptionally loose monetary policy. The Dow Jones Industrial Average dropped 0.52 per cent, the broad-based S&P 500 gave up 0.83 per cent and the tech-rich Nasdaq Composite Index sank 38.82 1.11 per cent. "The main focus is all about the reaction in the financial markets to Ben Bernanke's testimony," said Neil MacKinnon at VTB Capital financial group. "In my view it says more about an equity market that is 'overheated' and due a correction rather than any suggestion from the Fed that monetary stimulus is about to be withdrawn," he wrote in a note to clients. To believe that the Fed is imminently about to tighten policy would be a mistaken assessment. Why do that when the US economy is in a soft patch and when CPI inflation is falling below target? MacKinnon added.