Traders work on the floor of the New York Stock Exchange (NYSE) on February 27, 2023, in New York City. AFP
The euro moved up against the dollar as strong inflation data in France and Spain sparked concerns that the European Central Bank will also need to push interest rates even higher.
Oil prices rebounded, while the pound extended gains won on Brexit deal alterations aimed at smoothing some trading obstacles between the UK and the European Union.
Prime Minister Rishi Sunak and European Commission president Ursula von der Leyen on Monday agreed a sweeping overhaul of trade rules in Northern Ireland, which borders EU member Ireland.
Eurozone bond yields surged higher, with the yield on the benchmark German 10-year government bond rising to a 12 year high and the French 10-year government bond rising to an 11-year high.
European and US stocks slid on Tuesday as a bounce higher on Wall Street on Monday ran out of steam as investors await the release of further US economic data later this week.
Recent figures showing a robust US jobs market and inflation not coming down as quickly as hoped have spooked traders this month as they bet on more US interest rate hikes, wiping out most of January's equities rally.
"It hasn't been the most thrilling start to the week but that didn't stop investors from piling back into stocks on Monday in the hope that January data proves to be an anomaly," said OANDA analyst Craig Erlam.
"That enthusiasm didn't flow through" to Tuesday, he added.
Principal Asset Management analyst Seema Shah cautioned that it was "increasingly clear" that the Federal Reserve "is not yet finished with rate hikes".
"Relentless monetary tightening will eventually weigh on both the economy and earnings -- a headwind that will, inevitably, renew and extend the equity market drawdown," she cautioned.
Briefing.com analyst Patrick O'Hare pointed to US government bond rates also rising in anticipation of the Fed hiking rates further, which was weighing upon equities.
"We would expect interest rate moves to continue to dictate the action as we move into March, followed closely by earnings estimate trends," O'Hare said.
"Lately, that has been a toxic combination: interest rates moving up and earnings estimates coming down."
London stocks were weighed down Tuesday also by poor results from online supermarket Ocado.
Ocado shares slumped 8.9 percent to 569.16 pence in afternoon trading, topping London's fallers, after revealing it doubled losses last year as customers cut spending in response to rising prices.
Shares in troubled Italian bank Banca Monte dei Paschi di Siena fell 7.6 percent after French insurance giant AXA dumped its eight percent holding.
Key figures around 1430 GMT
London - FTSE 100: DOWN 0.7 percent at 7,878.74 points
Frankfurt - DAX: FLAT at 15,382.23
Paris - CAC 40: DOWN 0.1 percent at 7,287.35
EURO STOXX 50: DOWN less than 0.1 percent at 4,244.27
New York - Dow: DOWN 0.2 percent at 32,835.91
Tokyo - Nikkei 225: UP 0.1 percent at 27,445.56 (close)
Hong Kong - Hang Seng Index: DOWN 0.8 percent at 19,785.94 (close)
Shanghai - Composite: UP 0.7 percent at 3,279.61 (close)
Pound/dollar: UP at $1.2115 from $1.2064 on Monday
Euro/pound: DOWN at 87.69 pence from 87.94 pence
Euro/dollar: UP at $1.0623 from $1.0609
Dollar/yen: UP at 136.81 yen from 136.19 yen
Brent North Sea crude: UP 2.1 percent at $84.14 per barrel
West Texas Intermediate: UP 2.8 percent at $77.77 per barrel