European stock markets closed lower on Tuesday, giving up early gains after disappointing US housing data sparked a reverse on Wall Street, dealers said.

They said the losses were modest and equally due to profit-taking after a recent sustained advance to one-year highs on many markets as investors anticipated a solid recovery from the worst slump in decades.

US construction starts on privately owned homes rose 0.5 percent to 590 000, well short of forecasts for 610,000, while building permits fell 1.2 percent to 573 000 compared with estimates for 595 000 permits.

Dealers said that while the US housing market as a whole was stabilising after massive losses, the latest figures suggest that recovery will not be a straightforward return to normal levels.

In London, the benchmark FTSE 100 index of leading shares lost 0.72 percent to close at 5243.40 points. In Paris, the CAC 40 fell 0.54 percent to 3871.45 points and in Frankfurt the DAX was down 0.70 percent at 5811.77 points.

On Wall Street, the blue-chip Dow Jones Industrial Average was down 0.78 percent to hold just above the key 10 000 points psychological level at around 1615 GMT.

The US housing data was "striking fear that the looming expiration of the first-time homebuyer credit spells doom for the nascent recovery in that sector," Charles Schwab analysts said, referring to a government stimulus measure.

At the same, a sharp fall in wholesale prices surprised, sparking some concerns over possible deflation which could sap demand.

"The economic front is not offering much support," the Charles Schwab analysts said.

Dealers said that while US corporate results have largely been better-than-expected, driving both stocks and commodities to highs last seen a year ago, the markets need solid economic data as well to sustain their gains.

"The market ran out of steam because it has made large gains and can't go any further" for the moment, said one dealer in Paris.

The dealer said investors were watching Wall Street very closely as a result and its fall Tuesday inevitably led to the reverse in European trade.

The US housing sector figures are particularly sensitive since the property sector was at the heart of the sub-prime home loan bust that sparked the credit crisis in the first place.

In London, Barclays bank, which has avoided being taken over by the government as it bailed out the financial sector, fell nearly five percent after Qatar Holdings sold off part of its stake to take profits.

At the same time, supermarket chain Sainsburys jumped more than five percent on persistent speculation Qatar will try to gain full control after a failed attempt two years ago.

Elsewhere in Europe, Amsterdam dropped 0.65 percent, Brussels shed 0.86 percent, Madrid was down 0.80 percent, Milan shed 0.81 percent and Swiss stocks slipped 0.14 percent.

In Asia trade earlier Tuesday, Japanese stocks rallied 0.98 percent.

Hong Kong added 0.83 percent, driven by ample liquidity, and Shanghai put on 1.52 percent with Sydney up 1.11 percent.