TSX gives up gains as fear returns

World stock markets lost steam Tuesday after economic data out of Europe painted an ugly picture of the key continent's outlook.

European shares tumbled after data showed that Germany, Europe's biggest economy, grew just 0.1 per cent in the second quarter, sharply below expectations. Britain's FTSE 100 fell 1.4 per cent to 5,275.73. Germany's DAX dropped 2.6 per cent to 5,866.26 and France's CAC-40 lost 2.2 per cent to 3,168.14.

Beyond Germany, economic growth in the 17 countries that use the euro sagged to 0.2 per cent in the second quarter. In Britain, new data showed inflation rising because of higher rents and banking fees stoked fears that the wobbly British economy might also be in trouble.

North American markets were also lower, with the Dow Jones industrial average closing down 0.67 per cent, or 76.97 points, to 11,405.93 and S&P 500 was down one per cent at 1,192.76.

In Toronto, the benchmark S&P/TSX composite index was down 152.90 points or 1.21 per cent to 12,530.71. The decline was largely based on lower commodity prices. September oil was off $1.23 to $86.65 US a barrel. December gold gained $27.00 to $1,785.00 US an ounce.

Toronto's losses reversed five days of gains.

The Canadian dollar also lost .23 of a cent to close at 101.82 cents US.

Investors are also worried over recent data showing the U.S. economy is growing at a far slower rate than previously thought. The Federal Reserve last week decided to keep interest rates extremely low for two more years, saying it expected the economy to remain weak for that period.

Markets started lower and lost even more ground after noon once the leaders of France and Germany, the eurozone's biggest economies, said Tuesday that all countries that use the euro should have mandatory balanced budgets and better co-ordination of economic policy. They also pledged to harmonize their corporate taxes to show they are "marching in lockstep" to protect the euro.

German Chancellor Angela Merkel and French President Nicolas Sarkozy were meeting with the intention of soothing investors. But the summit appears to have had the opposite effect.

Japan's economy contracts

In Asia, figures Monday showed Japan's economy contracted further in the second quarter in the wake of March's devastating earthquake and tsunami.

Earlier in the day, Asian shares traded higher on the heels of a round of corporate deals in the U.S. that lifted Wall Street higher.

Japan's Nikkei 225 index rose 0.2 per cent to close at 9,107.43.

South Korea's Kospi jumped 4.8 per cent to 1,879.87 following a public holiday, with steelmaker POSCO soaring 7.4 per cent.

Hong Kong's Hang Seng lost 0.2 per cent to 20,212.08.