European stocks dropped the most in 10 months after the Federal Reserve signaled it will scale back its stimulus if the U.S. economy improves and as data showed Chinese manufacturing shrank.

The Stoxx Europe 600 Index lost 2.1 percent to 303.99 at the close of trading, as all but 26 of the 600 shares in the gauge fell. The benchmark yesterday climbed to its highest level since June 2008 as Fed Chairman Ben S. Bernanke initially told a Joint Committee of Congress in Washington that reducing stimulus too soon would endanger economic recovery.

U.S. stocks fell for a second day. The Standard & Poor's 500 Index yesterday tumbled 0.8 percent, erasing earlier gains, as Bernanke signaled the central bank will scale back stimulus if economic conditions improve. The flow of purchases could be reduced "in the next few meetings" if the Fed is confident gains in the economy can be sustained, he said in response to a question from Representative Kevin Brady.

A release from China showed manufacturing in the world's second-largest economy is contracting for the first time in seven months. The preliminary reading of a purchasing managers' index declined to 49.6 in May from 50.4 in April, HSBC Holdings Plc and Markit Economics said. That missed the 50.4 median estimate. Fifty is the dividing line between expansion and contraction.

National benchmark indexes declined in all 18 western-European markets.

FTSE 100 6,696.79 -143.48 -2.10% CAC 40 3,967.15 -83.96 -2.07% DAX 8,351.98 -178.91 -2.10%

Peugeot, Europe's second-largest carmaker, tumbled 5.3 percent to 6.99 euros. Renault SA lost 4 percent to 59.66 euros, while Daimler AG slid 3.3 percent to 48.05 euros.

Anglo American, the world's biggest platinum producer, slid 5.1 percent to 1,570 pence. Rio Tinto Group, the world's second-largest mining company, fell 4.3 percent to 2,913 pence.

HSBC Holdings Plc, Europe's biggest bank, slid 3.4 percent to 741.8 pence, while UBS AG, Switzerland's largest lender, lost 3.8 percent to 17.32 Swiss francs. An index of banking shares slipped 3.2 percent, the most since September.

Man Group Plc, the world's biggest publicly traded hedge fund manager, slumped 6.4 percent to 124.9 pence, its largest drop since October. Berenberg Bank started coverage of the stock with a sell recommendation. The brokerage said that Man's sales will probably remain slow and its margins will come under pressure as its seeks funds from institutional investors.

ARM Holdings Plc (ARM), whose chip designs power Apple Inc.'s iPhone and iPad, plunged 5.2 percent to 995 pence. Exane BNP Paribas downgraded the shares to neutral from outperform, saying that Intel Corp.'s new platform may enable it to outperform ARM's designs.

SABMiller Plc (SAB) lost 2.1 percent to 3,462 pence. The world's second-largest brewer said earnings before interest, taxes and amortization in the year to March 31 rose to $6.42 billion. That missed the median estimate of analysts that called for $6.46 billion.