Investors gave stocks and commodities a wide berth on Thursday on mounting worries about the strength of the global economic recovery after manufacturing data showed China's rapid growth was slowing.
Moody's warning late on Wednesday that it may cut the credit ratings of Spain added to the sour mood, which saw higher-yielding assets pressured.
Investors were also waiting to see how much banks, due to pay back 442 billion euros of one-year loans, will borrow from the European Central Bank's six-day funding facility -- a gauge of how dependent banks are on the ECB.
Asian growth has been the engine of the world economy so it doesn't bode well if China is losing steam, said Jacques Henry, analyst at Louis Capital Markets, in Paris.
The market had doubts about the global economy, and these numbers are confirming the doubts.
Starting the second half of the year on a negative footing, MSCI's all-country world stock index fell 0.6 percent to three-week lows, with its more risk-sensitive emerging market counterpart down 0.8 percent.
The MSCI world stock index fell 10.4 percent in the first half of 2010.
The FTSEurofirst 300 index of top European shares shed 1.4 percent, while the euro zone's blue-chip index, Euro STOXX 50, fell 1.4.
Earlier, Japan's Nikkei average fell 2 percent to a seven-month closing low.
An official survey showed the pace of Chinese manufacturing activity slowed in June to the lowest since February, while HSBC's separate purchasing managers' index dropped to a 14-month low, with outright drops in output and new orders.
While China's growth had been expected to cool from a double-digit pace in the first quarter, the latest reports combined with Europe's debt crisis and persistent weakness in the U.S. housing and labor markets to spread a negative view on the global recovery.
Bank stocks stayed under pressure with the STOXX Europe 600 banking index falling 2.1 percent as investors waited to see how much funding demand a ECB tender will attract. The result is due at around 0925 GMT.
On Wednesday, banks borrowed 132 billion euros of three-month money from the ECB, far less than the 210 billion euros forecast by analysts in a Reuters poll, easing some of the markets' worst fears about funding stress.
In the foreign exchange market, the euro reversed earlier declines, but commodity-based currencies like the Australian dollar fell on growth worries.
The euro rose 0.4 percent on the day against the greenback to $1.2284 and was 0.5 percent firmer against the yen at 108.71.
It was down to the downgrade outlook for Spain, which has forced investors to scale back positions on pro-cyclical and commodity-related currencies, said Carl Hammer, chief currency strategist at SEB in Stockholm.
The Aussie dollar shed 0.3 percent to $0.8372.
Oil prices fell for a fourth consecutive day, down 1.5 percent at $74.49 a barrel, while three-month copper futures on the London Metal Exchange slid 2.1 percent to $6,388.00 a tonne.
Against a risk averse backdrop, safe-haven assets such as U.S. Treasuries fared well, helping keep yields pinned down. The two-year U.S. Treasury note yield, at 0.62 percent was not far off a record low of 0.59 percent set on Wednesday.
(Additional reporting by Blaise Robinson, Kevin Plumberg and Naomi Tajitsu, editing by Mike Peacock)