World and emerging stocks slid to their lowest since Sept 2009 and the euro and oil fell on Tuesday on worries over the euro zone banking sector and concerns over tensions on the Korean peninsula.
The central bank takeover of a small Spanish lender at the weekend reminded investors that the world is only just recovering from a banking crisis, following weeks of anxiety over how to stop a debt crisis begun in Greece from deepening.
The bailout was likely just the first of several rescues of small lenders but analysts in Spain underline these have long been planned and are part of efforts to rationalize the sector rather than a threat to the stability of its financial system.
Markets, however, remain in generally nervous form.
Spanish banking fears certainly exacerbate contagion risks, said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
Across the globe, North Korean leader Kim Jong-il has told his military the country may have to go to war if the South attacks, with angry rhetoric on both sides having stepped up in recent weeks.
Global stocks as measured by MSCI <.MIWD00000PUS> fell 1.6 percent to their lowest since early Sept 2009, while the more volatile emerging index <.MSCIEF> dropped more than 3 percent to 8-/2 month lows.
The pan-European FTSEurofirst 300 <.FTEU3> index of top shares also fell close to 3 percent to its lowest since September
Holidays in many European countries on Monday delayed the sharp sell-off into Tuesday's trade.
The euro lost nearly 1 percent against the dollar to $1.2230 and sterling, the currency of another highly-indebted European country, fell 1 percent against the dollar to $1.4278.
SOME BONDS BENEFIT
The sell-off has benefitted U.S. and other assets seen as a safe haven from the storm spreading across southern Europe. German Bund futures hit a record high at 129.18, while 10-year yields were at their lowest ever.
The dollar rose 1 percent to 87.11 against a basket of currencies <.DXY> and 10-year U.S. Treasuries jumped 19/32 to 103-05, yielding 3.1253 percent.
Oil fell $2 a barrel to $68.22 but spot gold steadied at $1,191.50.
Funding conditions for banks have been tightening, with institutions in the United States increasingly reluctant to deal with firms with large exposure to Europe.
Money markets have seen an increasing reluctance to lend, particularly for longer terms, raising fears that dollar-funding strains could further hobble troubled banks, as seen in the aftermath of the collapse of Lehman Brothers in Sept 2008.
Confidence in the banking system doesn't have to retreat too far to have a meaningful impact when markets and positions are coming off relatively optimistic levels, said analysts at RBS in a client note.
(Additional reporting by Tamawa Desai; editing by Patrick Graham)