Stocks started the week on a downbeat note as investors feared a potential Greek debt default could wreak havoc on the global economy.
Japan's benchmark Nikkei index hit a 28-month low and the mood in Europe was equally grim, with bank stocks suffering dramatic declines over concerns over their exposure to the debts of Greece in particular. Sentiment was also soured by Friday's surprise resignation of Juergen Stark from the decision-making board of the European Central Bank.
Though the ECB cited "personal reasons" for Stark's resignation, the worry in the markets is that it was due to his opposition to the ECB's policy of buying up the bonds of countries like Italy and Spain. Though the program is designed to prevent the debt crisis from enveloping those two countries, it potentially exposes the ECB to the risk of huge losses on shaky bonds.
Monday's retreat comes despite a weekend insistence by Greek Prime Minister George Papandreou that his country would not default and that it was raising more money from a new property tax to plug a budgetary hole identified by international creditors.
"The political theatre playing out in Europe continues to drive investors towards the exits with policymakers adopting an increasingly tough line with respect to Greece as bailout fatigue in northern Europe starts to manifest itself alongside austerity fatigue in southern Europe," said Michael Hewson, market analyst at CMC Markets.
In Europe, Germany's DAX was 2.9 percent lower at 5,042 while the CAC-40 in France fell 4 percent to 2,856. The FTSE 100 index of leading British shares was down 1.7 percent at 5,126.
Deutsche Bank and BNP Paribas fell about 10 percent while Societe Generale shed 8 percent after it said it was accelerating plans to raise over euro4 billion ($5.4 billion).
As well as hitting stocks, the fresh bout of fears has hit the euro, which earlier fell to $1.3495, its lowest level since mid-February. Though it has since recovered to trade around a cent higher, the euro is still way down from the $1.43 mark it started the month at.
U.S. stocks were poised for further falls at the open _ Dow futures were down 1.5 percent at 10,780 while the broader Standard & Poor's 500 futures fell 1.6 percent to 1,133.
Europe's debt crisis has been one of the main reasons behind the turmoil in financial markets over the past few weeks, though concerns over the global economic recovery have contributed, too.
There's a raft of economic data out this week, particularly from the U.S., and the hope is that many indicators will recover from the battering they took last month when concerns over a possible U.S. default hung heavily on sentiment.
This week's U.S. dataflow could have a big impact on whether the Federal Reserve decides to enact another round of monetary stimulus to reignite the faltering U.S. economic recovery.
"These numbers will fine-tune speculation as to whether the Fed will take further policy action at the September 21 meeting," said Jane Foley, an analyst at Rabobank International.
Selling dominated the Asian trading session, where the Nikkei 225 stock average in Tokyo closed 2.3 percent lower at 8,535.67 _ its lowest closing level since April 2009. Japan's powerhouse export sector was hit hard by the ongoing strength of the Japanese currency, which makes products more expensive overseas.
The weekend resignation of Japan's new trade minister after just eight days in office also unnerved the Tokyo market.
The exceptionally brief tenure of Yoshio Hachiro undermined confidence in Prime Minister Yoshiko Noda, who is tasked with reviving the economy and speeding up Japan's recovery from the March 11 earthquake, tsunami and nuclear crisis.
In Hong Kong, meanwhile, the benchmark Hang Seng index shed 4.2 percent to 19,030.54 while Australia's S&P/ASX 200 plunged 3.7 percent to 4,038.50. Mainland China shares were closed for a national holiday.
Oil prices were under pressure alongside faltering stock markets _ benchmark oil for October delivery was down $1.36 to $85.88 in electronic trading on the New York Mercantile Exchange.
Tomoko A. Hosaka in Tokyo contributed to this report.