European stock markets fell on Tuesday as investors took profits after Moody's stripped France of its coveted triple-A rating, and before more eurozone talks on Greece's latest bailout cash.
The Paris CAC 40 index fell 0.50 percent to 3,422.43 points as Moody's cut France's bond rating by one notch to "Aa1", citing structural weaknesses in the French economy, slow reform, and French exposure to troubled eurozone countries.
It also warned that an additional downgrade was possible.
London's FTSE 100 index of top companies shed 0.35 percent to 5,717.82 points in late morning deals and Frankfurt's DAX 30 dropped 0.10 percent to 7,116.76.
Wall Street had surged on Monday on upbeat housing data and hopes that politicians will find a way to avoid the so-called "fiscal cliff" of automatic tax hikes and spending cuts in January.
European equities had also soared on Monday on rising prospects that Washington can reach a deal, but sentiment soured following the France downgrade.
"After yesterday's temporary respite, equity markets are looking strained once again after that Moody's downgrade of France served to heighten fears surrounding the eurozone crisis once more," said analyst Fawad Razaqzada at traders GFT.
"With the Eurogroup meeting today to discuss Greece's position, this latest development is something of an unwanted distraction, although perhaps some solace should be taken from the fact Paris has only received a one notch demotion."
In foreign exchange activity, the European single currency eased to $1.2804 from $1.2816 late in New York on Monday. Gold prices rose to $1,733.15 an ounce from $1,730.50 on the London Bullion Market on Monday.
"Moody's downgraded France's rating by one notch to Aa1/negative outlook but the market reaction was muted. This is hardly surprising given France had been on negative outlook since January," said RIA Capital Markets analyst Nick Stamenkovic.
France meanwhile insisted on Tuesday it was still a good investment destination.
"I would like to put in perspective the impact of this decision," said government spokeswoman Najat Vallaud-Belkacem.
"France still represents sound value, it is in second place just after Germany," she told France Inter radio.
"Even today, investors lend to France in very favourable conditions," she said. "For example, we make short-term borrowings at negative rates and that is going to continue."
Moody's was the second of the three major ratings agency to cut France's gilt-edged triple A rating. Standard and Poor's did so in January but Fitch has maintained its assessment of French debt so far.
Later on Tuesday, eurozone finance ministers were due to meet in Brussels over a likely agreement to hand debt-plagued Athens the latest instalment of cash it needs to avoid bankruptcy.
They will try to reach a framework agreement at a meeting on Greece and heal a split with the International Monetary Fund (IMF) over a key debt reduction target.
"Despite the fresh injection of optimism from the US, investors are once again being forced on to the sidelines as pressure in the eurozone continues to mount," added Mike McCudden, head of derivatives at stockbroker Interactive Investor.
"The Moody downgrade to France should come as no real surprise to investors who are using the recent rally as an opportunity for a rest until they hear the outcome of the eurozone finance ministers meeting over Greece.
"The general consensus is that an agreement will be reached to smooth over the cracks but once again highlight the increasing discord amongst the member states and the IMF. Investors will remain cautious."
Asian equity markets traded mixed on Tuesday as confidence that US politicians will agree a deal to avert a fiscal cliff was offset by profit-taking and the France downgrade.
Tokyo, which has risen about five percent in the past three sessions, ended the day 0.12 percent lower, after the Bank of Japan held off any new monetary easing measures following a policy meeting.
Hong Kong fell 0.16 percent and Shanghai eased 0.40 percent, while Sydney rose 0.56 percent and Seoul gained 0.64 percent.