Concerns about the U.S. economy prompted investor caution on Tuesday, cutting into what had been a recovery in stocks and boosting the yen.
Soft U.S. housing data on Monday hit shares of U.S. banks, brokers and mortgage lenders on Wall Street overnight and also dented stocks in industrial conglomerates dependent on economic growth.
It played to global investor fears that a slumping U.S. housing market will both undermine growth and, through failed mortgages, threaten financial stability among lenders and the overall ability to borrow.
The credit story is back with headlines about banks' exposure meaning that risk aversion is back to the fore, said Ian Stannard, senior FX strategist at BNP Paribas.
Markets have been fluctuating between nervous risk aversion and attempts to return to where they were before the crisis over U.S. risky mortgages hit in mid-June.
MSCI's main world stock index is down around 7 percent from its all-time high hit in July 20, but it has recovered about the same since hitting a low on August 16.
Worries had the upper hand on Tuesday.
European share prices took large losses, led by banks following a newspaper report on exposure by British bank Barclays to failed debt vehicles.
The investment banking arm of Barclays, however, denied the Financial Times report that it had been left with several hundred million dollars of exposure.
The pan-European FTSEurofirst 300 index was 0.8 percent lower, having closed higher for seven sessions in a row.
Earlier, Tokyo shares edged down. The benchmark Nikkei average lost 13.90 points or 0.1 percent to 16,287.49, while the broad TOPIX index fell 0.2 percent to 1,584.60.
Japan's yen rose and high yielding currencies dipped, reflections of caution.
The Japanese currency has become something of a proxy for risk appetite and aversion -- rising and falling respectively -- because of its role in the carry trade, where investors sell yen to buy assets in higher-yielding currencies.
The dollar was down 0.2 percent versus the yen at 115.50 yen. The euro eased 0.1 percent to 157.58 yen, but held steady against the dollar at $1.3644.
The euro also remained on the back foot after European Central Bank President Jean-Claude Trichet's said on Monday that his comments on policy on August 2 were made before the market turbulence, raising further doubts about a previously expected interest rate rise at next week's ECB meeting.
Euro zone government debt was flat, with a marginally better-than-expected Ifo survey of German business confidence draining earlier demand.
Spreads between emerging market sovereign debt and U.S. Treasuries narrowed.