European shares dropped 2.5% on Tuesday to their lowest closing level in two weeks after a steep jump in core US prices and weak US housing data.
The FTSEurofirst 300 index of top European shares closed 2.5% lower at 1,159.39 points.
Banks took a beating after a report by Barron's suggested the US government may have no choice but to nationalise the mortgage finance agencies Freddie Mac and Fannie Mae.
Royal Bank of Scotland sank 5.9%, Fortis tumbled 5% and Commerzbank shed 4.9%. The DJ Stoxx European bank index fell 4.3%. Insurers were also hurt by the knock-on effect,
US wholesale prices jumped in July while home builders cut construction due to a glut of unsold homes.
In other markets: Germany's DAX index lost 2.3% and France's CAC 40 shed 2.6%.
In Britain, the FTSE 100 shed 129.8 points, or 2.4%, to 5,320.4. The index is down 17% for the year to date.
Gas producer BG Group lost 0.5% after Origin Energy reiterated in Australia that its shareholders should reject a $US11.9 billion hostile takeover bid by the company.
Vodafone slipped 2.5% after the Financial Times said the company is to increase its minimum British call charges from September by at least 25% - 50%.
NZ & Australia
The New Zealand sharemarket dipped during trading on Tuesday, the NZX 50 index falling 15 points to 3319 on turnover of $257 million.
Telecom finished the day down 2c to $3.23, Contact Energy was down 1c to $8.60 and Fletcher Building was down 24c to $6.86. Fisher & Paykel Appliances was up 4c to $1.89.
Freightways was down 2c to $3.28 after posting a 5% increase in annual profit to $32.3 million on Monday.
PGG Wrightson was down 5c to $2.85 after making a full-year profit of $73.2 million.
AMP NZ Office Trust was up 1c to $1.07 after a 27% increase in profit to $52.2 million for the year to June. New Zealand Oil & Gas was up 2c to $1.48.
In the currency markets: at 6.30am on Wednesday, the New Zealand dollar was buying US71.26 cents, 81.77 Australian cents, 38.20 pence, 77.28 yen and 0.4828 euro. The Trade Weighted Index was at 66.36.
The Australian sharemarket closed down more than 2%. The S&P/ASX200 index was down 118.6 points, or 2.38%, to 4866.4, while the All Ordinaries fell 113.1 points, or 2.24%, to 4930.4.
The September share price index futures contract was down 166 points to 4839 on volume of 27,382 contracts.