The ECB provided commercial banks with a record 489.19 billion euros ($641 billion) via its first-ever 3-year refinancing operation, a move first welcomed as a decisive step in calming the eurozone debt crisis by bolstering the banks.
However, the amount involved could mean that the banks were in even worse shape than first thought and as investors took that view on board, the markets fell back, dealers said.
They said there was also some profit-taking given the sharp advance seen Tuesday after a series of strong US and German economic data.
In London, the FTSE-100 index of top companies closed down 0.55 per cent to 5,389.74 points. In Paris, the CAC-40 lost 0.82 per cent to 3,030.47 points and in Frankfurt the DAX 30 shed 0.95 per cent to 5,791.53 points.
Madrid fell 0.90 per cent and Milan shed 0.97 per cent.
In New York, stocks were lower too, with the blue-chip Dow Jones Industrial Average down 0.69 per cent at around 1710 GMT while the Nasdaq Composite fell 0.58 per cent.
However, US shares were off their lows after revised numbers for the US housing market suggested it has finally hit bottom, offering hope for a pick-up in activity.
The euro slipped to $1.3051 from $1.3078 in New York late Tuesday.
Dealers said investors had become unsettled by the ECB action which drew increasingly sceptical reaction through the day.
"Such a large amount is worrying and shows that there are considerable tensions on the interbank funding market," Xavier de Villepion, dealer at Global Equities, said, referring to lending among the banks.
Moneycorp analysts were also wary about what the banks would do with the funds, which they get at just 1.0 per cent and then can put into relatively safe government bonds returning much more.
"Ostensibly, the purpose... is to avoid a credit crunch resulting from banks' reluctance to lend to one another," they said in a note.
"However there is a suspicion, even an expectation, that banks will load up with three-year money at 1.0 per cent and lob it into three-year Italian government bonds at 5.0 per cent or whatever.
"There are more than a few reasons why that strategy is not viable in the long run," they said.
The ECB move is meant to provide the banks with the cash to lend onto business, thereby boosting activity and easing strains in the economy so that governments can manage the public finances better.
It the money goes instead into government bonds, for example, this might help ease borrowing costs for weaker eurozone states but it is unclear if that is the ECB's intention, although it has been buying up such bonds directly.
At Dutch banking and insurance group ING, economist Martin Van Vliet said: "The (ECB) allocation... is the equivalent of nearly one and a half times the bond issuance programmes of Spain and Italy in 2012."
Italian data meanwhile showed that the economy contracted for the first time since 2009 under the weight of the debt crisis, shrinking by 0.2 per cent in the third quarter.
"The ECB and politicians will be hoping that today's provision of cheap liquidity will keep the temperature from rising any further under the eurozone but the real test will be whether measures taken will allow Italy to meet its huge borrowing need next year," said Rabobank analyst Jane Foley.
Asian markets were firmer as nervousness over the death of North Korean leader Kim Jong-Il eased. Tokyo rose 1.48 per cent and Seoul gained 3.09 per cent, with Sydney up 2.13 per cent and Hong Kong ahead 1.86 per cent.
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