The FTSE 100 index of leading British shares was down 124.42 points, or 2.8 percent, at 4,279.50, while Germany's DAX was 151.85 points, or 3.0 percent, lower at 4,873.68. France's CAC-40 index was 111.73 points, or 3.2 percent, lower at 3,394.02.
U.S. stock futures indicated a lower start on Wall Street, following Monday's 74 point decline. Dow Jones industrial futures shed 187 points, or 2.1 percent, to 8,700, while Standard & Poor's 500 futures fell 17.20, or 1.9 percent, to 910.00.
The latest jitters have been stoked by a run of disappointing corporate news in the U.S. Earlier, homebuilder Toll Brothers Inc. said it couldn't project a profit for 2009 and Starbucks Corp. reported earnings that missed Wall Street expectations.
With the government and bond markets closed for Veterans Day, no economic reports are scheduled. Instead, investors will examine earnings reports for direction during the session. And the Toll Brothers and Starbucks reports pointed to ongoing problems in two of the market's greatest areas of concern: housing and consumer spending.
Their problems come in the wake of the announcement on Monday by electronics retailer Circuit City Stores Inc. that it has filed for bankruptcy protection.
Investors are also speculating about the fate of automakers General Motors Corp., Chrysler and Ford Motor Co. after the automakers met with lawmakers last week in hopes of securing financial help. Shares of GM, which announced a $2.5 billion third-quarter loss on Friday and warned that it could run out of cash next year, plunged 23 percent Monday to levels not seen since shortly after World War II.
The run of bad news out of the U.S. so far this week has more than offset any relief over China's announcement Monday that it is to boost its economy with a near $600 billion package between now and the end of 2010.
"Investors' enthusiasm soon faded after corporate news provided a reminder that the U.S. economy is in a sickly state," said Stephen Lewis, an analyst at Monument Securities.
Worries about the global economy are taking their toll on oil prices as traders price in lower demand. By early afternoon London time, the cost of a barrel of oil was down $2.64 cents at $59.77, fueling further selling pressure of heavyweights BP PLC and Royal Dutch Shell, down 3 percent and 2 percent respectively.
In Europe, financial stocks were doing particularly badly with Swiss bank UBS AG down 6 percent and Deutsche Bank 3.6 percent lower, and Allianz nearly 4.5 percent down.
Russian stocks took a big battering Tuesday, forcing regulators to suspend trading for an hour for excessive losses. The MICEX was down 8.3 percent to 680.1 points by 12:30 p.m. (0930 GMT).
Earlier, Tokyo's Nikkei 225 index dropped 272.13 points, or 3 percent, to 8,809.30, while the Hang Seng benchmark in Hong Kong lost 703.73 points, or 4.8 percent, to 14,040.90.
Elsewhere in Asia, China's Shanghai Composite index fell 1.7 percent to 1,843.61 while Australia's index tumbled 3.6 percent and India's Sensex fell 5 percent. Markets in Singapore, Taiwan and South Korea were also hit with heavy selling.
The losses in Asia are in stark contrast to Monday when trading was rejuvenated by China's 4 trillion yuan ($586 billion) stimulus package. Other countries, including the U.S. and Britain, are expected to unveil fiscal packages soon.
In a speech Monday night, British Prime Minister Gordon Brown called for "better co-odination of fiscal and monetary policy".
Howard Wheeldon, senior strategist at BGC Partners in London, said markets should be ready for this weekend's meeting of the G-20 group of leading industrial and developing countries to agree tentatively to "fiscal expansion amongst the participant countries, more joint action, plans from each to boost domestic consumption and commitments to ensure protectionist barriers are not put up, more plans to foster life into the moribund WTO (World Trade Organization) trade talks."
The dollar weakened 0.1 percent to 97.89 yen, while the euro was 0.4 percent lower at $1.2707.
AP Business Writers Madlen Read in New York and Jeremiah Marquez in Hong Kong contributed to this report.