Debt worries hammered European markets on Monday, knocking both the euro and regional shares down 1 percent while also weighing heavily on world equities, sending emerging markets down nearly 2 percent.
Investors were digesting a block of bad news about the euro zone crisis. Following Fitch Ratings cut of Greece's debt ratings by three notches on Friday, pushing the country's debt deeper into junk status, rival Standard & Poor's cut its outlook for Italy to negative from stable on Saturday.
Spanish voters added to the angst, becoming the latest electorate to punish sitting European governments for the current economic climate.
The ruling Socialists were hit by stinging losses in local elections and now face a balancing act between voter anger over sky-high unemployment and investor demands for strict austerity measures.
There's a risk of everything becoming excessively politicized which will be detrimental for the economy, said Carlos Berzosa, professor of applied economy at Madrid's Complutense university.
Investors reacted to the various events with a burst of risk aversion, shifting funds into U.S. government debt, gold and the dollar.
The euro fell, for example, to a record low against the generally safe-haven Swiss franc.
It lost around 1 percent against the dollar and was down 1.2 percent against the yen.
Worries about some form of debt restructuring by Greece was a key element of the sell off.
If Greece were to restructure its debt that could prompt Ireland and Portugal to follow with debt restructuring of their own, Adrian Foster, head of financial markets research for Asia-Pacific for Rabobank International in Hong Kong, said in a research note.
It is difficult to imagine them proceeding with economically (and politically) painful fiscal austerity whilst Greece gets debt forgiveness, he said.
European shares suffered the same fate as the euro, with the FTSEurofirst 300 index selling of 1.3 percent.
It's more than Greece now. This is more a reflection of the inability of the EU to sort out anything, and that makes people worry beyond Greece, said Lothar Mentel, chief investment officer at Octopus Investments.
Risk aversion spread beyond Europe. World stocks as measured by MSCI were down more than 1 percent.
It was particularly hit by emerging markets losses. The MSCI emerging market stock index was down more than 2 percent, for a year to date loss of more than 3 percent.
Emerging markets, despite the strong economic condition that some of them enjoy, are still seen as relatively risky investments and therefore sell off when sentiment turns cautious.
Yields on peripheral euro zone bonds rose.
The spread between the yields on 10-year Spanish and Italian bonds and their German counterparts reached their widest levels since January .
Investors, however, bought core euro zone debt. The June Bund future hit its highest level since January.
(Additional reporting by Brian Gorman, Fiona Ortiz and Saikat Chatterjee; Editing by Toby Chopra)