Stocks sank around the world as fears spread that Italy and Spain's debt burdens would plunge them further into crisis and after Moody's Investors Service issued a warning about accounting issues at dozens of Chinese companies.
Britain's FTSE 100 sank 1.6 per cent, while Germany's DAX lost 2.2 per cent. A technical error prevented data on France's CAC 40 from updating after the index dived 2.4 per cent in early trading, but trading on the Paris bourse continued normally. Japan's Nikkei lost 1.4 per cent and Hong Kong's Hang Seng sank 3 per cent, its largest one-day drop in 14 months.
Dow stock futures fell 0.7 per cent to 12,401, while S&P 500 futures declined 1 per cent to 1,305.40.
Battered European banks skidded more than 3 per cent to a two-year low.
Investors also dumped the euro and peripheral euro zone government debt. Italian 10-year government bond yields broke above 6 per cent for the first time since 1997. Traders said a move towards 7 per cent could be a tipping point for bond yields, making the cost of refinancing unsustainable.
The euro hit four-month lows of $1.3837 (U.S.) and fell to a record low against the safe-haven Swiss franc.
In a bid to keep Italy and Spain from the same fate as Greece, Portugal and Ireland, euro zone finance ministers have promised cheaper loans, longer maturities and a more flexible rescue fund. But they set no deadline, shaking investor confidence.
Italy's finance minister, Giulio Tremonti, is due to chair an emergency meeting of leaders from the government and opposition on Tuesday in an effort to secure swift passage of his austerity package through parliament, the Financial Times reported.
Some investors are openly betting on a euro zone breakup, using Italy as a proxy, Credit Suisse has told clients, while Mitsubishi UFJ Securities is advising investors to position for such an event.
Gold priced in euros hit record highs for a second day, up 0.3 per cent at 1,110.30 euros an ounce, having hit a record 1,118.58 euros an ounce earlier. COMEX August gold futures eased 0.2 percent to $1,546.6.
In Asia, Moody's warnings on accounting and governance risks at dozens of small Chinese companies sparked a sell-off in their shares and bonds. Moody's said it screened 49 junk-rated companies and a few investment-grade firms in China against 20 criteria, grouped into five categories: weak corporate governance, risky business models, fast-growth strategies, poor earnings quality and audit concerns.
Oil prices, with benchmark oil for August delivery down $1.07 to $94.08 a barrel.
The Canadian dollar dipped, trading at $1.0263 (U.S.).
Sonali Verma