Standard & Poor's cut its rating outlook on Japan on Tuesday and China implemented a clampdown on lending, hitting investor confidence about global economic recovery.

Germany's Ifo business sentiment indicator rose and Britain formally exited recession, albeit very weakly, but stock markets clearly needed stronger positive signs.

At lot of emphasis was being placed on China's implementation of a previously announced move against lending, with banks and commodities the major fallers in Europe.

China is one of the main drivers of the global economy and any sign it may be seeking to slow down tends to rattle markets.

Since China has started its banking proposals ... this has generally been seen as a concern, said Justin Urquhart Stewart, director at Seven Investment Management.

How do you let the air out of the balloon easily, the answer is with difficulty ... there is a level of Chinese uncertainty which hangs as a cloud over us.

World stocks as measured by MSCI <.MIWD00000PUS> were down 0.7 percent with their emerging market component <.MSCIEF> -- a sector particularly sensitive to China -- down 1.8 percent.

Emerging stocks, last year's star performer with a nearly 75 percent gain, have lost nearly five percent so far this year.

The pan-European FTSEurofirst <.FTEU3> looked past the relatively bullish European data from Germany and Britain and was down 0.6 percent.

Earlier, Japan's Nikkei <.N225> closed down 1.8 percent. That was before S&P cut its outlook.

NEGATIVE JAPAN

The yen gained broadly after China's move on required reserves for some banks, although it wobbled for a while on the S&P report.

The ratings agency cut its outlook for Japanese debt, citing reduced wriggle room on fiscal policy and disappointment with the new government's budget consolidation plans.

Higher-yielding and commodity-linked currencies tend to fall on any hint China may be putting the brakes on its economy, providing support to the likes of the yen.

It hit a five-week high against the dollar at 89.42 yen and a nine-month high against the euro at 125.96 yen.

The euro fell 0.4 percent to $1.4093.

Euro zone government bonds yields were flat.

(Editing by Mike Peacock)

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