UPDATE 6-German banks hit in late trade.

(From FT Investor (Stories))

LONDON (FT.com) - Fading gains for Wall Street stocks, added to credit rating downgrades in the German banking sector sent European stock markets lower by the close of play on Tuesday.

After spending most of the session modestly higher, the bourses all fell in late trade as US stocks erased their early gains. Standard and Poor's, the ratings agency, added to the gloom after it lowered its ratings on Commerzbank and its outlook for HVB Group, sending the banking sector in Germany sharply lower.

"There's a plethora of reasons to remain very much on the defensive in these markets, whether we look at P/E ratios still above historical norms, earnings downgrades, no capital expenditure pick-up [or] global economic weaknesses," said Steve Hatton, strategist with spread-betting company Deal4Free.com

The pan-European FTSE Eurotop 100 index was down 2 per cent at 1,774.84, while the Xetra Dax index in Frankfurt was 4 per cent lower at 2,561.95.

In Paris, the CAC 40 fell 1.4 per cent to 2,694.23 and London's FTSE 100 was down 1.3 per cent at 3,731.1. See London markets report

David Buik at Cantor Index said: "Political uncertainty and a supreme loss of investor confidence are the two main reasons why Western stock markets are currently being decimated."