LONDON, Nov 4: European shares eased in early trade on Tuesday after Hong Kong suffered another setback and shattered expectations that Monday's rally in Wall Street would breathe new life into battered markets. A late plunge in Hong Kong's Hang Seng index, which ended 4.21 per cent lower, reminded traders about the precarious state of Asian markets which sparked last week's sharp losses.

Monday's strong Wall Street close, with the Dow Jones Industrial Average rising 3.12 per cent and posting its third biggest points gain, was insufficient tonic. ``If the market's taking more notice of Hong Kong than of Wall Street, it just shows how bearish the underlying tone really is,'' one dealer in London said.

Foreign exchange trade saw generally bearish sentiment weigh on the yen as the failure of a Japanese broking firm focused traders' attention on the problems besetting Japan's financial sector.

The dollar lost ground against the mark but was underpinned against the yen by tension in the Gulf, while sterling consolidated after making strong gains overnight.

``The yen is driving things at the moment,'' said Rob Hayward, economic adviser at Bank of America. ``People are focusing on the collapse of Sanyo Securities, and while things have calmed down in Asia and Latin America, they are looking at the impact of the recent stock market moves may have on the Japanese economy.''

The FTSE 100 was off 11.5 points, or 0.23 per cent, at 4,894.9 by 1000 GMT. Early forecasts had been for a one per cent gain on the back of Wall Street. German shares slipped back after initial gains. Dealers said the overnight gains on Wall Street were balanced out by the weaker dollar and the losses in Hong Kong.

The IBIS DAX index of blue chip shares was down 27.01 points or 0.7 per cent in electronic trading at 3,820.72. ``It's mainly a bit of pressure from overseas, from Asian markets, because they didn't follow the New York lead,'' said one trader. ``And the dollar of course is also adding some downward pressure here.''

Traders said the nervous start was a sign that last week's turbulence had not yet been forgotten. Some noted that Wall Street's recovery had been in thin volume trade, with many of the bigger operators sidelined.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.