I don't think Europe believes this is the start of a turn just yet, people got a little carried away

Justin Sandler, analyst Eden Group

Analysts blamed the decline on an overly optimistic surge on Wednesday, all based on the results of one firm.

London shares closed modestly lower, while German stocks slumped in reflection of the US falls.

Wednesday saw an explosive rally in US tech stocks, with the key Nasdaq index rising 8% following news of a threefold increase in profit at internet and telecoms equipment maker Cisco Systems.

Caution urged

"I just don't think Europe believes that this is the start of a turn just yet," said Justin Sandler, an analyst at stockbrokers Eden Group.

"People had got a little carried away with regard to Cisco's results."

Analysts have pointed out that Cisco's impressive profits performance owed much to cost controls and cut backs rather than increased demand.

"This is just a snapback rally. Nothing fundamental has changed in corporate America, and I don't think this is a turnaround," said Jack Francis, managing director at UBS Warburg.

Modest falls

In London, the FTSE 100 blue chip index closed 11.5 points lower at 5,198.

US and European stock markets, Thursday 2100 GMT

Dow Jones 10,037 -104 Nasdaq 1,651 -46 London FTSE 5,198 -12 Frankfurt Dax 4966 -62 Paris Cac 4387 -18

In Japan, the benchmark Nikkei 225 index ended its second straight session of gains up almost 1% or 112.55 points at 11,633.30.

On Wednesday, the Nasdaq had its biggest one-day rally in over a year, fully recouping hefty losses incurred earlier this week.

The Dow Jones index of blue-chip shares rallied in sympathy, settling more than 3% up on the day at 10,141.83.

Dented confidence

The Dow had performed strongly during the first three months of the year amid signs of a strong economic recovery in the US, making up all of the ground lost after the 11 September attacks.

Nothing fundamental has changed in corporate America, and I don't think this is a turnaround

Jack Francis, UBS Warburg

But a slew of lacklustre corporate sales forecasts from blue-chip companies halted the index's steady rise two weeks ago.

High levels of corporate debt and persistently sluggish demand have sapped confidence in tech sector firms' ability to deliver strong earnings growth in the months ahead.

And fears that initial forecasts of a quick economic rebound may have been over-optimistic put share values under added pressure.

The outlook for the wider US economy remains uncertain, with consumer spending showing signs of waning and business investment still weak.