Banks across Europe were particularly badly hit by recession fears after Citigroup announced it would cut thousans of jobs, with Barclays PLC down 6 percent, HBOS PLC another 12 percent, Deutsche Bank AG 5 percent and Commerzbank AG 6 percent.
"There is huge uncertainty hanging over the markets' head, and banks are really out of favor," said Howard Wheeldon, senior strategist at BGC Partners.
The morning losses in Europe follow similar drops in Asia. Tokyo's Nikkei 225 stock average fell 194.17 points, or 2.3 percent to 8,328.41, a day after confirmation Japan, the world's second largest economy, had slipped into a recession. Hong Kong's Hang Seng Index shed 4.5 percent to 13,131.23.
The lurch lower in Europe and Asia followed Wall Street, where traders sold heavily on evidence of more economic weakness and Citigroup Inc's announcement Monday that it is to cull 53,000 jobs around the world as it seeks to deal with the impact of the financial crisis.
The Dow fell Monday by 223.73 points, or 2.6 percent, to 8,273.58. The Standard & Poor's 500 index fell 22.54, or 2.6 percent, to 850.75. Wall Street futures pointed to a lower open on Tuesday. Dow futures were down 1.1 percent to 8171.
Some hopeful signs emerged with the news that inflation in Britain fell in October for the first time in 14 months largely because of cheaper oil prices.
Official figures showed that the annual rate of the consumer price index measure of inflation dropped to 4.5 percent in the year to October from 5.2 percent in the year to September. Analysts had expected a more modest decline to 4.7 percent.
As a result, the markets are expecting the Bank of England to continue to cut interest rates aggressively over the coming months, with some predicting it to lop off another percentage point of its benchmark rate when it meets again in early December.
"So long as credit conditions improve significantly over the coming quarters, in line with government support measures for the banking system, the very low level of interest rates and likely fiscal stimulus should act as a powerful stimulus for the economy," said David Page, European economist at Investec Securities.
Further good inflation news is anticipated out of the U.S. later. Producer price data are expected to show that falling energy and commodity costs are substantially easing industrial cost pressures. Analysts are forecasting that the producer price index for October will fall a monthly 1.7 percent, way more than the 0.4 percent decline recorded in September.
Earlier in Asia, the Shanghai Composite index slid 6.3 percent after advancing four straight days. Australia's main index declined 3.6 percent and South Korea's Kospi fell 3.9 percent.
In Asia too, banks were badly hit, with Japanese mega bank Mitsubishi UFJ Financial Group Inc. down 7 percent, while China Construction Bank 6 percent as investors soured on Bank of America's deal to increase its stake in Chinese company.
Wilting prices for oil, metals and other commodities sent resource companies lower. China's Sinopec Corp. dropped 5.7 percent and Australia's BHP Billiton Ltd., the world's largest miner, retreated 3.6 percent.
Fears of a prolonged recession around the world sent oil prices drifting below $55 a barrel Tuesday. Light, sweet crude for December delivery slipped 55 cents to $54.40 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. The contract Monday fell $2.09 to settle at $54.95, the lowest since January 2007. Prices have fallen about 62 percent since reaching a record $147.27 in mid-July.
In currencies, the dollar was steady at 96.32 yen, while the euro was 0.2 percent weaker at $1.2616.
AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.