Most European stock markets are down following US and Asian falls, which came despite Tuesday's US rate cut.
Asian and European shares followed Wall Street downwards
The Federal Reserve's cut from 4.5% to 4.25% had been expected by the markets. Many had hoped for a bigger reduction.
The Federal Reserve also warned about "the intensification of the housing correction and some softening in business and consumer spending".
In London, the FTSE 100 had recovered some of its losses by the afternoon and was trading down 0.4% at 6513.5.
Frankfurt's Dax index regained all its early lost ground to buck the trend, trading up 0.2% at 8021.5.
The Cac 40 in Paris was down 0.5% at 5697.7.
Earlier, New York's Dow Jones fell 2.1%, the technology-heavy Nasdaq fell 2.5% and the Nikkei in Tokyo closed down 0.7%.
'Get over it'
"The action on Wall Street was very much knee-jerk on the disappointment of not getting a 50 basis point cut," said Craig James at Commonwealth Securities.
"Investors will get over it, but for today at least it will be a case of following the negativity," he added.
The Federal Reserve's latest warnings differ markedly from those made by Fed Chairman Ben Bernanke after last month's interest rate cut, when he sounded a relatively upbeat note on the health of the US economy.
At that time, it was suggested that the greater risks came from inflationary pressures due to higher energy and food prices.
But on this occasion, it warned that "recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation."
"They left open the possibility of additional rate reductions," said Carl Tannenbaum, chief economist at LaSalle Bank.
He expects the next cut could come as soon as January.
In addition to cutting its benchmark rate, the Federal Reserve also trimmed the rate at which it lends money to banks.
In an attempt to smooth out problems in the credit markets, it reduced its primary discount rate from 5% to 4.75%.
This is designed to boost the amount of money in the financial system, making it easier for banks to borrow from each other.