By Marius Bosch
FRANKFURT, Sept 30 (Reuters) - European stocks plunged on Tuesday as the weak dollar pummelled exporters like auto makers DaimlerChrysler and Volkswagen amid rekindled worries about the global economic recovery.
Investors, fearing companies may struggle to meet expectations in the upcoming corporate reporting season, stepped up selling on the final day of the third quarter after weak U.S. consumer confidence data raised more questions about the health of the economy.
Tuesday's decline was led by currency-sensitive export stocks like autos and chemical groups as the dollar hovered around three-month lows against the euro.
"The currency is a big trigger here. I am afraid we are going back in this downward spiral where bad news triggers lower earnings," said Ulf Moritzen, fund manager at Nordinvest in Hamburg.
The FTSE Eurotop 300 ended 1.77 percent lower at 862 points, racking up its eighth straight session of declines. The index of Europe's top 300 blue chip stocks earlier fell as much as 2.3 percent to its lowest level since early August.
The narrower DJ Euro Stoxx 50 index was down 1.83 percent at 2,395 -- only nine points above its 2002 close.
CONSUMER WOES
Data showed U.S. consumer confidence unexpectedly fell in September while the pace of business expansion in the MidWest slowed. The news whacked U.S. shares and sent yields on U.S. Treasuries sharply lower.
"The key is the bond market: we're seeing a serious test of the lower end of the range for 10-year U.S. Treasury yields. A sustained close below 4.0 percent would mean that bond investors were telling us not to bet on recovery, which would be bad for stocks and bad for the dollar," says Gerry Celaya, a director at technical analysts Redtower Research.
In Europe, an earlier raft of data pointed to improving sentiment but little sign of concrete improvement with weak sales, poor job conditions and sliding industrial orders.
The Dow Jones industrial average was 0.44 percent weaker while the Nasdaq Composite Index was down one percent by 1802 GMT.
Around Europe, the German DAX closed 2.08 percent down after earlier falling as much as 3.6 percent -- its biggest one-day drop since mid-May. London's FTSE 100 was 1.24 percent down. Paris lost 1.68 percent and Zurich shed 1.15 percent.
Market volatility as measured by Germany's so-called "fear barometer," the Volatility DAX , surged six percent on Tuesday. The VDAX has gained 34 percent this month -- the biggest monthly increase since the end of last year.
AUTOS CRASH
The DJ European auto sector hit a two-month low, led by a 3.5 percent fall from Porsche , DaimlerChrysler's 2.3 percent fall and a 1.75 percent weaker BMW as the dollar hit a three-month low against the euro .
Volkswagen fell 2.6 percent and Renault , which is less exposed to the key U.S. market than its German peers, lost 2.3 percent.
Airlines were also to the fore, with Dutch carrier KLM soaring 12.5 percent after announcing it had finalised an all-share deal to join larger rival Air France at a sizeable premium for its shareholders.
Air France was down 4.16 percent on concerns it might have paid too much to finalise the plan.
British insurer Royal & Sun Alliance sagged 4.7 percent after investment bank Morgan Stanley slashed its price target on the stock following its recent 960 million pounds rights issue.
Other European insurers also tumbled.
Dutch Aegon lost 3.6 percent, reinsurer Munich Re shed 2.9 percent and Allianz retreated two percent.
Among the few blue-chips to gain, Dutch retailer Ahold , rose 0.7 percent ahead of its long-awaited 2002 results and restated numbers from previous years at 0600 GMT on Thursday.
(Additional reporting by Lincoln Feast and William Kemble-Diaz in London)
* For a story and table on how European markets fared this quarter, please double click on [nL30654630]