In London the FTSE 100 (^FTSE) lost 1.3% to close at 7,289 points, deepening its losses following the sharp sell-off in the previous session. The CAC 40 (^FCHI) fell 0.2% in Paris, while in Frankfurt the DAX (^GDAXI) shed 1%.
Queen Elizabeth II will lie in state in Westminster Hall inside the Palace of Westminster, from Wednesday until a few hours before her funeral on Monday 19 September, with long queues expected to file past her coffin to pay their respects.
The pound (GBPUSD=X) reversed some of its recent gains against the dollar as a rise in core prices intensifies concerns that price rises have become embedded into the UK economy.
Sterling fell as much as 0.3% to $1.148 against the strengthening greenback, slightly ticking up to $1.153 in afternoon trade. It dipped 0.1% against the euro (GBPEUR=X) to €1.15.
Consumer price index (CPI) inflation unexpectedly fell to 9.9% in the 12 months to August from 10.1% the month before, according to the Office for National Statistics (ONS) on Wednesday.
However the ONS said core prices, which exclude volatile items like energy and food, ticked up to 6.3% from 6.2%, suggesting price rises are firmly embedded across the economy.
Fuel prices were the largest contributor to the downward move while food costs were the biggest driver of inflation last month.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "There has been a fresh bout of anxiety on financial markets amid worries that inflation is still proving to be a formidable opponent to take down.
"The UK headline inflation rate has slipped from its highest rate in four decades, as the dip in crude oil prices leads to lower fuel bills but this easing of price pressures for UK consumers hasn’t helped the pound, which retreated back below $1.15 amid a fresh strengthening of the dollar.
"The expectation is that the Bank of England won’t now push down quite as hard on the monetary brake pedal as the Federal Reserve is forecast to do in terms of rate hikes after the US inflation snapshot came in higher than expected."
Across the pond, Wall Street indices opened in the green after enduring their worst session since June 2020 on Tuesday following the hotter-than-expected US inflation print.
The new numbers showed CPI rose 8.3% in August from the same month a year ago. This was down from 8.5% in July, and from the 9.1% jump in June 2022 – the highest inflation rate in 40 years.
Asian markets sealed the global losses overnight as the US inflation report dashed hopes for a peak in inflation and fuelled bets that the Fed may have to raise rates higher and for longer.
"The implications from the hotter-than-expected numbers are clear," Richard Hunter, head of markets at Interactive Investor said.
"Whereas the recent market rally was predicated on an assumption that inflation had peaked, it remains more resilient than had been hoped, such that the Fed will have little option but to continue with its aggressive monetary policy."