Fears surrounding the stability of the 17-country eurozone _ particularly the state of Spain's financial system and whether Greece might be forced out of the single currency union _ pushed global markets down again on Thursday.
Greece has called another round of elections for June 17 after the last one proved inconclusive and coalition talks to form a government fell apart. Greeks gave strong support to parties that reject the country's international bailout and the tough austerity measures it comes with.
But without that rescue package, Greece will likely default and have to leave the eurozone. That would result in financial disaster for Greece and send shockwaves through European markets, destabilizing other weak countries.
As a result, the new elections are shaping up as a referendum on whether Greeks want their country to stay in the eurozone or not.
"The recent political paralysis has now brought Greece to what could prove to be the worst stage of its crisis," said Athanasios Vamvakidis, an analyst at Bank of America Merrill Lynch. "Although polls in Greece show very strong support for the euro, we believe that the current situation could trigger a chain of events that could lead Greece to exit on its own."
Adding to losses over the past two weeks, Britain's FTSE 100 closed down 1.2 percent to 5,338.38 while Germany's DAX fell 1.2 percent to 6,308.96 and France's CAC-40 lost 1.2 percent to 3,011.99. The euro dropped 0.1 percent to $1.2707, close to the yearly lows last hit in January.
Spain's Ibex saw one of the sharpest drops, but recovered somewhat to close 0.9 percent lower, as investors fear the country would be the most destabilized by a Greek exit from the euro. A local report that depositors were drawing money out of the country's fourth-largest bank, Bankia, sent shares in the now-nationalized lender down 14.1 percent and accelerated the Spanish bourse's fall.
Spain's bond yields were also high, edging up to 6.29 percent for the 10-year note, an indication investors are worried about the country's financial future. The concern is that if Spain has to rescue any more of its banks, its government finances may be overwhelmed, forcing it to take a bailout of its own.
On Wall Street, stocks fell despite relatively upbeat economic indicators from the U.S. this week. The Dow Jones industrial average dropped 0.5 percent to 12,533.61 while the S&P 500 fell 0.7 percent to 1,315.79.
Concerns about Europe's crisis offset any cheer from a Labor Department report showing applications for U.S. unemployment benefits held steady last week, a sign layoffs are not increasing, and news that Wal-Mart's income rose more than expected in the first quarter.
In Asia, markets enjoyed a slight rebound as investors went bargain-hunting after better-than-expected growth figures for the first quarter in Japan.
Tokyo's Nikkei 225 climbed 0.9 percent to close at 8,876.59 as the dollar fell 1.2 percent to 79.34 yen.
South Korea's Kospi added 0.3 percent to 1,845.24. Benchmarks in Taiwan, New Zealand and the Philippines also rose. Australia's S&P/ASX 200 slipped 0.2 percent to 4,157.40 and Hong Kong's Hang Seng closed 0.3 percent down at 19,200.93.
Mainland Chinese shares bounced back from early losses, buoyed by calls from the country's central bank governor, Zhou Xiaochuan, for market reforms.
The benchmark Shanghai Composite Index rose 1.4 percent to 2,378.89. The Shenzhen Composite Index also gained 1.4 percent to 954.95. Shares in brokerages, financial and trading-related companies led the gains.
Benchmark oil for June delivery was up 5 cents to $92.86 per barrel in electronic trading on the New York Mercantile Exchange. On Wednesday, the contract fell by $1.17 to finish at a seven-month low of $92.81 per barrel in New York.
Pamela Sampson in Bangkok and Fu Ting in Shanghai contributed to this report.