The prospect of further rises in interest rates in the eurozone unnerved both equity and bond markets yesterday.

The ECB raised borrowing costs by 25 basis points to 2.5 per cent, an increase that had been fully priced into the market, analysts claimed.

But Mr Trichet said interest rates remained accommodative and the central bank had revised up its forecasts for eurozone economic growth and inflation. His comments were interpreted as indicating that further tightenings were in store.

President Trichet seems uncomfortable with leaving rates at current ‘accommodative’ levels for too long, given excess liquidity and house prices.

Further evidence of the eurozone recovery came from very strong German retail sales data for January. The pan-European FTSE Eurofirst 300 index fell 1 per cent, while the Xetra Dax index in Frankfurt shed 1.4 per cent.

The prospect of higher eurozone rates helped to push the euro to a three-week high against the dollar, above $1.20. European government bond prices fell back, with the yield on the 10-year Bund rising to its highest since April. Yields on US Treasury bonds and UK gilts rose in sympathy.

Wall Street edged lower as investors fretted about higher oil prices and disappointing February sales figures from leading retailers.

Asian equity markets were mixed, with the Nikkei 225 Average in Tokyo slipping 0.3 per cent, Seoul edging back 0.3 per cent but Hong Kong gaining 0.4 per cent.