AMSTERDAM (AP) -- Israeli airstrikes on targets in the Gaza Strip hit markets Wednesday, with European shares falling most amid work stoppages in southern Europe and worries about economic growth across the continent.
Israel's bombing of multiple Hamas targets in Gaza reinforced the pessimism that has gripped investors over the past week or so. In addition to worries about the economic future of Greece, investors are concerned about possible tax hikes and spending cuts in the U.S.
In Europe, Britain's FTSE 100 dropped 1.1 percent to close at 5,722.01, while Germany's DAX fell 0.9 percent lower at 7,101.92. France's CAC-40 ended 0.9 percent lower at 3,400.02.
On Wall Street, stocks had opened higher as Cisco's earnings came in ahead of expectations, before Israel launched the airstrikes -- at mid-session the Dow Jones industrial average was down 0.7 percent to 12,673.06 and the S&P 500 fell 0.68 percent to 1,366.57.
Israel said the strikes, which killed a Hamas military commander, were the start of a broad operation in response to days of heavy rocket fire from militants in the neighboring Palestinian territory.
While monitoring developments in the Middle East, investors remain unnerved by what's going on in Europe. Workers in Greece, Italy, Spain and France demonstrated to protest the austerity measures that governments have been imposing to reduce public debt. Flights were delayed around the continent due to transportation strikes.
Meanwhile, official figures showed industrial output in the 17-country eurozone dropped 2.5 percent on the month in September, worse than analysts had expected. Figures Thursday are expected to confirm that the eurozone is in recession.
"September's plunge in eurozone industrial production provides firm evidence that the economic outlook in the region is continuing to deteriorate," said Ben May, an analyst at London-based Capital Economics. "We expect the eurozone to fall deeper into recession in the latter part of this year and worse is to come in 2013."
In addition, investors are monitoring developments in Washington. Unless lawmakers hammer out a deal to cut the budget deficit by Jan. 1, a series of tax increases and revenue cuts will be implemented that may push the U.S. back into recession.
"Investors' hopes that the election would end uncertainty remain unfulfilled," said Lawrence Creatura, a portfolio manager at Federated Investors in Rochester, New York.
In Asia, traders were hopeful that a transition of power in China will be followed by greater initiatives to shore up its economy. On Wednesday, President Hu Jintao stepped aside to make way for Vice President Xi Jinping as party leader.
Hong Kong's Hang Seng jumped 1.2 percent to 21,441.99. Mainland Chinese shares also gained, with the Shanghai Composite Index rising 0.4 percent to 2,055.42. The Shenzhen Composite Index gained 0.3 percent to 818.60. Japan's Nikkei 225 rose marginally to close at 8,664.73
Benchmark oil for December delivery was up 80 cents to $86.18 in electronic trading on the New York Mercantile Exchange, and energy shares reversed course after the Israeli attack. ExxonMobil was trading 0.3 percent higher at $86.76 a share.
The euro rose 0.3 percent to $1.2743 from $1.2704 late Tuesday in New York. The dollar rose strongly against the yen, up more than a percent to 80.21 yen from 79.41 yen.
AP Business Writers Steve Rothwell and Pamela Sampson contributed to this story from New York and Bangkok.