More than 1 percent falls in Hong Kong .HSI and South Korea .KS11 led Asian markets to one-month lows .MIAPJ0000PUS as the prospect of a rise in U.S. borrowing costs and slower world growth haunted developing markets.

European stock exchanges started with some cautious gains before inching back into the red, and the euro was back on the defensive as investors bet the U.S. Federal Reserve would move next month, driving the dollar broadly higher.

"People are a little nervous because the macro signals are so mixed," said Andy Sullivan, a portfolio manager with Swiss investment firm GL Financial Group.

"The weak revenues we've seen on aggregate in the earnings season are obviously a sign of concern. Growth is both tepid and fragile. But profits were better and that says to me that companies have got themselves in better shape."

After a healthier start, the pan-European FTSEurofirst 300 .FTEU3 index was down less than 0.1 percent while the euro zone's blue-chip Euro STOXX 50 index .STOXX50E was marginally higher. Both have gained almost 10 percent this year, having recovered from a China-driven dip in July and August.

Vodafone was among the leading gainers after a strong earnings report, although political uncertainty continued to weigh on Portuguese stocks. More than three quarters of U.S. and European companies have now reported for the quarter.

A bigger than expected fall in Chinese inflation followed disappointing trade figures over the weekend and underlined the problems in an economy that has driven world growth for a decade. But they also add to expectations of more stimulus measures from Beijing to counter any slowdown.

"Today's data point to intensifying deflation risks in the Chinese economy which warrant more policy easing," said HSBC economist Jing Li, forecasting 3 full percentage points of cuts in banking reserve ratios this and next year.

Shanghai stocks .SSEC were among the strongest performers, down just 0.1 percent at the close.

After pausing on Monday, the dollar was back near 6-month highs against the euro in morning trade in Europe, up more than 0.1 percent on the day.

Higher U.S. interest rates will make parking funds in the dollar more attractive, especially as some of the dollar's major rivals such as the euro have negative interest rates. Most major banks expect the greenback to strengthen into the end of the year.

 

(Reuters)