LONDON, June 24: European stock markets closed sharply lower Tuesday, extending recent losses on growing concern over rising inflation risks and the prospects of slower growth.

Dealers said this deadly combination known as ‘stagflation’ appears more likely over time as the global credit crunch plays out and the global economy slows markedly against the backdrop of soaring oil and other commodity prices.

They said the worry is that as inflation picks up, central banks will feel they have to hike interest rates to check prices even when slowing economies need lower borrowing costs to boost demand.

The European Central Bank has clearly warned that an interest rate hike is possible at its upcoming policy meeting in July while the US Federal Reserve, which began a two-day board meeting Tuesday, has recently taken a much harder line on inflation.Stocks are beginning to come under sustained pressure because investors now feel that profits will falter as the global economy slows, dealers added.

In London, the London FTSE 100 index closed down 0.57 per cent at 5,634.70 points. In Paris, the CAC 40 lost 0.83 per cent at 4,473.76 points and in Frankfurt the Dax fell 0.81 per cent to 6,535.97 points.

The Euro Stoxx 50 index of leading eurozone companies fell 0.67 per cent.

The euro was at 1.5589 dollars.

Oil prices meanwhile were close to 138 dollars, revisiting near-record highs.

In Asia, Japanese shares closed little changed but

Hong Kong lost 1.14 per cent while Sydney was marginally higher.

On Wall Street, opened lower were lower again as a negative outlook from parcels delivery giant UPS and news that home prices are still falling darkened the mood ahead of the Fed meeting.

However, sentiment steadied in a technical rally, with the Dow Jones Industrial Average up 0.19 per cent at around 1615 GMT.—AFP