European fears grow, sending shares lower

(Reuters) - The euro and shares extended losses on Monday as the outlook for Europe's economy unexpectedly worsened in April, adding to fears that leading governments in the region may soften their resolve in tackling a debt crisis.

Flash Purchasing Manager's Indexes (PMIs) for Germany, France and the euro zone signaled a much faster rate of economic contraction than had been expected, dampening hopes the region will secure the growth needed to overcome the impact of planned government austerity measures. <EUR/PMIS>

"Business confidence slumped lower and companies cut head counts at the fastest rate since early 2010 in order to reduce capacity to meet lower workloads," said Chris Williamson, chief economist at data compiler Markit.

The single currency dropped 0.5 percent to $1.3145, down from a two-week high on Friday, while the FTSE Eurofirst .FTEU3 index of top European shares fell 1.5 percent to 1030.66 points, having just posted its best week in a month.

April's PMI for the euro zone's dominant service sector fell to 47.9 from 49.2 in March - a five-month low and below forecasts in a Reuters poll of more than 40 economists which projected a rise to 49.3.

The bleak economic outlook came as investors were adjusting to the strong showing by Socialist challenger Francois Hollande in the first round of France's presidential election, and as a budget crisis in the Netherlands threatened to bring down the government.

"It's beginning to look like the perfect storm," said Stewart Richardson, chief investment officer at RMG.

"If there is a Dutch election coming up soon it just adds to the whole cocktail of worries for the market."

The news sent safe-haven German government bond yields to record lows of 1.585 percent, while yields on the ultimate safety play, 10-year U.S. Treasury notes, sank to a seven-week low of 1.926 percent.

Yields on most other peripheral euro zone debt worsened with Spain's 10-year jumping to yield over six percent, while the cost of insuring Dutch debt against default jumped to its highest since January.

(Additional reporting by David Brett; Editing by Elizabeth Piper)