European equities slumped Monday and the euro tumbled to its lowest point since January, as markets were hit by mounting fears over the eurozone and a potential exit of Greece from the currency bloc.
Investor sentiment was rattled as Greek politicians failed again to form a government over the weekend, while the German government faced more gloom at the polls.
Madrid and Milan shares also plunged by more than 3.0 percent early in the day on heightened concern that the pair could fall victim to the eurozone sovereign debt crisis, should Greece leave the eurozone.
In London, the benchmark FTSE 100 index of top companies lost 1.97 percent to 5,465.52 points, while in Frankfurt the DAX 30 dropped 1.94 percent to 6,451.97 points and in Paris the CAC 40 fell 2.29 percent to 3,057.99 points.
The European single currency dived at one point to $1.2830, the lowest point since January 18. It later recovered to stand at $1.2845, down from $1.2917 late in New York on Friday.
The dollar slipped to 79.81 Japanese yen from 79.92 yen on Friday.
"The lack of confidence in the euro is telling as stock markets Europe-wide are feeling the weight this Monday," said broker Jonathan Bristow at Valbury Capital.
"Greece's time in the euro seems limited now, and a large bill for their default will need to be paid and Germany's percentage of that will be large enough to shake the eurozone further."
"European markets have dropped sharply lower today driven down by growing concerns that a Greek exit could mark the beginning of the fracturing of the euro," said Michael Hewson, Senior Market Analyst at CMC Markets UK.
"This fear has sent European bond yields in Spain and Italy surging, while German yields have dropped to all-time lows on safe haven capital flows," he added.
Madrid closed down by 2.66 percent and Milan was down 2.74 percent. Amsterdam shares dropped by 2.37 percent, Zurich by 1.33 percent and Brussels 2.28 percent.
Spain had to pay higher rates to raise 2.903 billion euros in short term debt on Monday, while on the secondary market the yield on Spanish 10-year bonds rose to 6.227 percent.
Italian benchmark yields also rose, reaching 5.697 percent, while the yield on the German bund, a safehaven investment amid the turmoil, fell to 1.457 percent. French benchmark yields rose to 2.829 percent.
Markets have tumbled since pro-austerity parties were kicked out of government in France and Greece on May 6, in a backlash against the swingeing cuts put in place as part of moves to balance budgets.
Greek president Carolos Papoulias was due Monday to have talks aimed at breaking a political deadlock since polls in which voters rejected the major parties' austerity measures imposed under EU and IMF loan agreements.
If they fail to form a government by Thursday, new elections will have to be called for June.
Greek stocks fell another 4.56 percent, having lost more than 11 percent last week.
ETX Capital trader Markus Huber said uncertainty had reemerged as a main factor in the markets.
"While a Greek exit might actually be a good thing for the eurozone in the long run, as then the sole focus and efforts can be on bigger countries like Spain and Italy and how support them, in the short term however there is uncertainty regarding how much damage a Greek exit would actually cause," he said.
Fitch ratings agency said the spillover from a Greek eurozone exit on European corporates would depend on whether or not it is disorderly, with an orderly exit having "limited fallout confined to the periphery."
However, "a disorderly exit would have a wide-ranging impact with the potential for corporate downgrades across Europe, though the largest concentrations would be in Spain, Portugal and Italy."
ETX Capital's Huber said markets were also reacting to "the heavy election defeat of Angela Merkel in Germany's most populous state, with German voters indirectly -- like their French counterpart -- voting also against the austerity measure of the German government."
The party of German Chancellor Angela Merkel -- the main proponent of swingeing austerity measures to rebalance the region's economies -- suffered a severe defeat Sunday in the country's most populous state.
The defeat also comes days before she hosts French president-elect Francois Hollande who won on a platform of growth over cuts and a promise to renegotiate the eurozone's fiscal pact for tighter budgetary rigour.
US stocks sank on renewed eurozone worries while turmoil at JPMorgan Chase over its $2 billion derivatives loss last week kept US bank shares under pressure.
In midday trading the Dow Jones Industrial Average fell 0.74 percent to 12,725.96 points, while the S&P 500 lost 0.72 percent to 1,343.71 points and the tech-rich Nasdaq dropped 0.63 percent to 2,915.36 points.