World shares fell close to 1.5 percent Monday, with European equities tumbling more than 2 percent as investors worried that Greece would default amid signs of disagreement among euro zone policymakers.
Japan's Nikkei closed at a 2-1/2 year low.
Yields fell on long-term core euro zone debt, home to safety plays during times of strife, but the euro fell against the dollar.
Markets were partly reacting to the failure over the weekend of the Group of Seven industrialized nations finance ministers to come up with more than a stated commitment to help turn the world economy around.
But they were mainly focused on the euro zone debt crisis.
German policymaker Juergen Stark's resignation from the European Central Bank's board on Friday underscored internal divisions over its bond-buying program -- one of the central bank's main weapons in fighting the debt crisis by forcing down yields of country's under pressure from the bond markets.
This is clearly not good news for the market, it is bad news for the banks and the equity markets, it just keeps them under pressure, Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin, told Reuters.
At the same time, worries bubbled up again over the ability of Greece to meet its commitments to qualify for more bailout money.
Fears about a Greek default rose last week after senior politicians in German Chancellor Angela Merkel's center-right coalition started talking openly about it. Greece, meanwhile, confirmed on Monday that the country has cash for only a few more weeks.
International lenders threatened last week to withhold the sixth bailout payment of about 8 billion euros ($11 million) because of the country's repeated fiscal slippage.
The Greek government announced on Sunday a new property tax to make sure it would meet its budget targets and qualify for the tranche.
Europe is not just lurching from one crisis to another. It is lurching into a new one before the previous one is solved, said Makoto Noji, senior strategist at SMBC Nikko Securities.
The euro dived to a seven-month low against the U.S. dollar and a 10-year trough versus the yen.
The outlook for Greece is almost completely unknown. Support for the country appears to be shaking. The market is starting to think the worst could happen, said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust and Banking.
It's as if policymakers are starting to prepare for that, Kitakura said.
The euro fell as low as $1.34949, its lowest since February.
On bond markets, Italian and Spanish government bond yields rose, feeling the pressure of upcoming debt supply and the rising concern over Greece.
(Editing by Patrick Graham)