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Goodbye, stock market rally. Hello, anxiety.

The euro zone malaise is back, sapping the strength out of equities for a fifth straight day on Tuesday. The losses brought the Toronto index back to where it began the year, while Wall Street endured its worst day of 2012 and European shares took another trouncing.

The market's sudden reversion to doom and gloom is a big change from two weeks ago, when global equities were winding up one of their best first quarters in more than a decade. Analysts say the abrupt shift to fear is the result of growing concern about Europe's darkening economic outlook and flagging growth in China and the United States.

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The Dow Jones industrial average sagged 1.7 per cent while most European indexes declined 2 per cent or more. Shares in Toronto fared relatively well, dropping only 0.7 per cent, as a rally in gold shares, often a safe harbour in times of nervousness, helped offset losses elsewhere.

It was Europe that sparked the selloff Tuesday. In an ominous development, investors dumped Italian and Spanish bonds, driving up their yields, which move in the opposite direction to bond prices.

Yields on 10-year Spanish government bonds crept close to 6 per cent, an elevated level that economists don't consider sustainable for long periods. Meanwhile, cash poured into such traditional safe havens as gold and super-safe U.S. Treasury bonds – vehicles that investors use for parking cash in times of trouble.

"The outlook is looking pretty bleak at the moment in the euro zone with bond yields creeping up in Italy, Spain and Portugal and investors looking to keep their money safe investing in U.S., U.K. and German 10-year bonds," said Craig Erlam, market analyst in London Alpari (U.K.) Ltd., a foreign-exchange brokerage firm.

The European bond movements suggest investors are fretting that the austerity policies adopted by many heavily indebted countries will worsen the continent's recession, which in turn will make it difficult for governments to cut their deficits, a vicious circle that will be bad for investors.

Anxiety about the U.S. recovery has also soared in the wake of the payroll figures released Friday, which showed the country created only 120,000 new positions in March, about half the gain many market watchers had been hoping to see.

The poor figures come despite near-zero interest rates, huge government deficits, and rounds of money printing and other unorthodox monetary policies intended to stimulate growth.

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The U.S. economy is "barely growing by 2 per cent a year," said Stephen Takacsy, portfolio manager at Lester Asset Management in Montreal. "It's surreal. Things have not really picked up in the U.S. to the degree that they should and that's very worrisome."

China is also causing unease because of speculation the country will have a so-called "hard landing," in which growth will decelerate below the 7.5 per cent figure being projected this year. "China remains a risk," National Bank of Canada economist Marco Lettieri said.

Combined with Europe and the U.S., "all these things are coming into play and will probably affect the markets for a couple of months," he said.

Over the past few years, the markets have had a repeated series of sizeable declines, only to come roaring back later to make new bull market highs. Something similar may happen this time. "It will bring forth a good buying opportunity" for investors who have held onto some cash and are prepared to wait until the correction ends, Mr. Lettieri said.

Mr. Takacsy also suggested the decline may offer a buying opportunity, but only "for companies whose stock doesn't deserve to go down as much as the market has dragged it down by."

He has his eyes on media and telecommunication stocks, which he said are safe, defensive plays.

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