Stocks in Stockholm fell back Tuesday, following its upbeat reaction to the euro deal the previous day.

• Shares in Stockholm plunge as panic spreads

World stock markets fell and the euro retreated against the dollar on Tuesday as euphoria over a massive eurozone bailout gave way to doubt over countries' ability to reduce their deficits, analysts said.

The OMX Stockholm 30 index was down 1.65 percent in early afternoon trading. The previous day the index rallied 6.3 percent.

The decline was lead by a number of companies that had lead to race on Monday, such as the four biggest banks SEB, Handelsbanken, Nordea and Swedbank. Also Boliden and Lundin Petroleum fell back.

Analyst Henrik Mitelman from SEB Bank told Swedish Radio that Tuesday's fall was a natural fall-back following Monday's gains, and only temporary.

Compared to last week stocks in Stockholm were down more than 6.50 percent while being up 4 percent since the turn of the year.

A day after posting massive rises, equity indices also declined on profit-taking.

London fell 1.78 percent in late morning trade after closing up more than five percent on Monday.

British investors were in addition keeping a close eye on local political developments as party leaders were locked in talks to form a new government.

However most of the focus was on the EU's huge rescue package announced on Monday.

"The (market) gains from the one-trillion-dollar bailout were short lived as speculators foresee tough cutbacks for the troubled European states," Manoj Ladwa, senior trader at ETX Capital in London, said Tuesday.

"The dollar rallied overnight as the debt problems in the eurozone and political uncertainty in the UK sends traders in search of a safe haven currency," he added.

The Paris stock market dropped 2.09 percent in midday deals, a day after rocketing 9.66 percent -- its third biggest rise in history.

Frankfurt on Tuesday shed 1.23 percent, Athens lost 1.96 percent and Madrid gave up 4.07 percent.

Earlier in Asia, Tokyo closed down 1.14 percent and Hong Kong gave up 1.37 percent.

Shanghai closed at its lowest level in nearly a year as higher-than-expected Chinese inflation data and housing prices triggered fears of fresh credit tightening moves, dealers said.

In foreign exchange trade, the euro fell to 1.2696 dollars after spiking above 1.30 dollars on Monday. The single currency was also lower versus the British pound and yen.

Europe avoided a disaster thanks to the trillion-dollar financial rescue package for troubled eurozone economies, French Finance Minister Christine Lagarde said in a newspaper interview.

"Every public official, including me, had in our minds the fear of a disaster if we did not quickly reach an agreement," Lagarde told the financial daily Les Echos on Tuesday.

"All the symptoms that had preceded the crisis of autumn 2008, just before the bankruptcy of Lehman Brothers, reappeared. It's undeniable," she said, referring to the failure of the Wall Street giant in September 2008.

The deal agreed by European Union finance ministers early Monday marks a "historic turning point," she said.

Global financial markets soared on Monday hours after the EU and the IMF gave their backing to the 750-billion-euro rescue package for crisis-hit euro countries aimed at limiting the fallout from a debt crisis in Greece.

"The rescue package turned out to be bigger than expected, making credit fears recede for now," said Hideaki Inoue, a senior dealer at Mitsubishi UFJ-Trust and Banking Corp.

"But worries still linger, leaving few people willing to buy the euro aggressively."

Analysts at Charles Schwab & Company said the financial rescue package on top of a 110-billion-euro EU-IMF bailout of Greece had cooled eurozone debt contagion fears and preserved the outlook for the continuation of the global recovery.

"Our opinion is that the risk-reward ratio has become positive again," said Wells Fargo chief market strategist Al Goldman.

The debt crisis began as Greece teetered toward default, triggering fears that other weak economies such as Portugal, Spain and Italy may be next.

Greece will on Tuesday ask the European Union and International Monetary Fund for a first tranche of debt aid worth 20 billion euros (26 billion dollars), a finance ministry source told AFP.

A first instalment of the emergency loan package amounting to 14.5 billion euros from the EU and 5.5 billion euros from the IMF "should be available, possibly within the day," the ministry source said.

US stocks meanwhile rebounded strongly on Monday, with the blue-chip Dow index closing up nearly four percent.

After announcement of the debt rescue, the US Federal Reserve, the European Central Bank and central banks in Japan, Britain, Canada and Switzerland pledged to ensure that dollar shortages did not occur in European markets.

Elsewhere, US regulators were Tuesday racing to enact new rules to prevent a repeat of last week's stock market free-fall.

Days after markets were badly shaken by a near 1,000-point drop on the Dow Jones Industrial Average, the Securities and Exchange Commission said additional "circuit breakers" were being considered.

Although markets had been roiled by fears that Greece's debt crisis would spread to other eurozone countries and derail the global economic recovery, other factors are thought to have played a role.

The speed of Thursday's slide suggested that a mistaken trade or computer error could be involved, observers said.