Greece's shock decision to hold a referendum on its euro zone bail-out package sent investors scurrying for safer investments on Tuesday, hammering stocks and punishing the euro.
It scotched any immediate expectations for an end-of-year stock rally. Wall Street looks set to open sharply lower.
An unexpected fall in PMI data for China's manufacturers also hurt investor risk-taking sentiment as did Monday's failure of US trading firm MF Global Holdings Ltd due to euro zone debt exposure.
European stocks were down 3 per cent and MSCI's all-country world stock index shed nearly 2 per cent.
Greek Prime Minister George Papandreou's announcement on Monday that he will put Greece's bail-out to a referendum immediately cast doubt on the euro zone's plan to hand Athens 130 billion euros and arrange a 50-per cent 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 referendum is a bad idea with a bad timing. The post-summit rally is over," said Lionel Jardin, head of institutional sales at Assya Capital in Paris.
The referendum -- details of which have not been accounced -- is not expected until the beginning of next year, which means uncertainty is likely to continue throughout November and December.
The FTSEurofirst 300 index of top European shares was down 3.2 per cent after tumbling 2.2 per cent in the previous session.
Euro zone banks were hammered, with Societe Generale down nearly 14 per cent and Credit Agricole down 10.5 per cent.
Earlier, Japan's Nikkei closed down 1.7 per cent.