The euro held near six-week highs above $1.03, profiting from weakness in U.S. asset prices and in optimism about European economic growth prospects.

The sell-off on European bourses began when bond yields soared on fears that interest rate rises were likely on both sides of the Atlantic, and after the Dow's slide on Monday.

The slide continued apace after not only the Dow Industrials average .DJI) began one percent down but the technology-laden Nasdaq composite also shed more than two percent.

Previously high-flying technology and telecommunications stocks were hardest hit in Europe, too.

``People didn't want to spoil the general trend last year, but now they can start to see some risks,'' said Gerry Evans, European strategist at Enskilda Securities in London.

Dutch software maker Baan saw its shares slump 30 percent after it forecast a loss. German rival SAP was caught in the downdraft and was off 4.13 percent.

Consumer products, financials and energy shares also suffered heavy losses, the latter following a three-percent overnight fall in crude oil prices.

``People are waking up to the fact that has been pointed out to them for a few weeks now, that bond markets have been going south quite quickly and are indicating that we really do expect interest rate rises,'' said Evans at Enskilda.

``Equity markets have been ignoring that, but are now starting to factor it in. That is the primary reason (for today's weakness),'' he added.

Britain's FTSE 100 index stayed down 3.4 percent on Tuesday afternoon, near its lows on the day.

Just Correcting End-Year Bubble?

But dealers said the market was just correcting some of the inflated valuations that bubbled up during the volatile trading seen over the dying sessions of last year.

Tech sector leader Nokia lost 8.71 percent while Finnish telecom operator Sonera lost 12.3 percent. Energy shares were led lower by a 4.9 percent fall in Shell Transport.

Shares in aero-engine maker Rolls-Royce Plc rose 4.44 percent after weekend press speculation about a possible merger with U.S. rival Pratt & Whitney. Some investors also saw the stock as undervalued, analysts said.

Pratt & Whitney parent United Technologies dismissed the Rolls speculation as ``preposterous.''

In the insurance sector, shares in European's largest insurer Allianz AG fell 8.3 percent despite Morgan Stanley Dean Witter raising its rating on the German insurer to ``neutral'' from ``underperform.''

Equity Weakness Props Bond Prices

Euro zone government bond yields eased on bargain hunting attracted by the previous high yield levels, and traders said weakness in the equity markets was helping support bond prices.

Earlier euro zone bond yields hit two-year highs as possible rate hikes and impending supply pressured the post-holiday market.

The yield on the benchmark 10-year German Bund DE10YT-RR smashed through 5.5 percent and peaked in European morning trade at 5.559 percent before settling back.

The European Central Bank (ECB) Council meets on Wednesday and holds a news conference afterwards, though no rate hike is expected.

A Reuters poll of 36 European analysts, published on Monday, found none expected the ECB to hike at its next meeting but that 22 expected a rate rise in the first quarter of 2000.

The euro held above $1.03 in early trade after an overnight rally to six-week highs, and traders cited Monday's Wall Street weakness and optimism over European growth for the euro surge.

The dollar held firm near 103 yen after rising on Bank of Japan intervention during Tokyo trading hours.

Currency traders said all eyes were trained on U.S. stocks and bonds for further direction.