Greece's shock decision to hold a referendum on its euro zone bail-out package sent investors scurrying for safer investments Tuesday, hammering stocks and punishing the euro.
It scotched any immediate expectations for an end-of-year stock rally.
An unexpected fall in PMI data for China's manufacturers also hurt investor risk-taking sentiment as did Monday's failure of U.S. trading firm MF Global Holdings Ltd due to euro zone debt exposure.
European stocks were down close to 3 percent and MSCI's all-country world stock index shed 1.7 percent.
Greek Prime Minister George Papandreou's announcement on Monday that he will put Greece's bailout to a referendum immediately cast doubt on the euro zone's plan to hand Athens 130 billion euros and arrange a 50-percent write-down on its huge debt.
It raised the possibility of a disorderly default on its debt if Greeks vote against the plan.
But more broadly it also threw into chaos the euro zone's wider attempts to stop the debt crisis spreading to more significant economies such as Italy.
Attempts to get countries such as China and Brazil to fund an enhanced euro zone rescue fund, for example, will have hit a major barrier, given that it is not clear that the euro zone's grand compromise agreed last week will stand.
The risk is that a 'no' from the Greeks will completely derail the rescue efforts, one Paris-based trader said.
Furthermore, the referendum -- details of which have not been announced -- is not expect until the beginning of next year, which means uncertainty is likely to continue throughout November and December.
We can kiss the year-end rally goodbye, the trader said.
The FTSEurofirst 300 <.FTEU3> index of top European shares was down 2.7 percent after tumbling 2.2 percent in the previous session.
Euro zone banks were hammered, with Italy's UniCredit (CRDI.MI) down 8 percent and France's Credit Agricole (CAGR.PA) down 11.5 percent.
Earlier, Japan's Nikkei <.N225> closed down 1.7 percent.
On foreign exchange markets, the euro fell more than one percent versus the dollar and yen as investors cut exposure to the common currency, fearing a disorderly default.
The dollar dipped slightly versus the yen, however, having pulled back from a three-month high as the impact of Japan's massive intervention on Monday faded a touch. It last traded down 0.1 percent at 78.10 yen, with market players wary of further yen selling by the Japanese authorities.
The Greek referendum is a real curve ball, nobody saw it coming and it injects a lot of uncertainty, said Steven Saywell, head of FX strategy at BNP Paribas.
Some analysts, meanwhile, said investors would be wary of buying the dollar too aggressively given a two-day Federal Reserve meeting that concludes on Wednesday and key U.S. jobs data due on Friday. Any hints that the Fed is considering further monetary easing, or signs the economy is flagging, could drive the greenback lower.
Worries about the impact of the Greek decision on other euro zone countries sent the difference between yields on Italian and Belgian 10-year bonds and those of benchmark German counterparts to lifetime highs.
(Additional reporting by Blaise Robinson and Nia Williams; editing by Stephen Nisbet)