World stocks slumped and the euro plunged on Tuesday after Greece announced a bailout referendum, renewing risks of a Greek default, debt contagion and recession.
Weaker Chinese data also rattled investors.
European stock indices were down 2.0-6.0 percent at mid-day led by big falls for bank shares after Greek Prime Minister George Papandreou announced a referendum on a rescue deal to stop the eurozone crisis.
Italian sovereign bonds were also under acute pressure.
The euro fell sharply to $1.3693 from $1.3851 late in New York on Monday, while Asian indices also slid following a overnight slump on Wall Street.
"The wheels look set to fall off the European bailout effort as the Greek prime minister's call for a referendum sent the market into a tail spin," said ETX Capital trader Manoj Ladwa.
"Equities are trading lower ... as the market begins to factor in an ever increasingly likelihood of a Greek default."
With leaders of the world's 20 biggest economies getting ready for a summit from Thursday focused on the economic crisis, Papandreou's unexpected referendum move and decision to hold a confidence vote shook markets.
Greek stocks plunged 6.31 percent amid warnings that a rejection of the EU deal that is deeply unpopular in Greece would force the country to leave the 17-nation bloc which uses the European single currency.
"Clearly, from the perspective of financial markets, the (referendum) news increases the risk of a disorderly Greek debt default as well as increasing the probability that France and Germany lose patience with Greece thus forcing a Greek exit from monetary union," said VTB Capital analyst Neil MacKinnon.
European stock markets were a sea of red nearing the half-way mark on Tuesday.
London's benchmark FTSE 100 index slumped 2.55 percent to 5,403.00 points, Frankfurt's DAX 30 dived 4.17 percent to 5,886.09 points and in Paris the CAC 40 plunged 3.67 percent to 3,123.75 as bank shares lost more than ten percent. Stocks in Madrid were down 3.27 percent.
Italian stocks plunged 5.63 percent led by big falls for banks.
Italian government bonds came under heavy pressure amid concerns that Italy could be dragged further into the eurozone debt crisis.
The spread between rates on Italian 10-year government bonds and benchmark German ones meanwhile widened to a new record of 436.3 basis points.
The yield on 10-year bonds also rose to around 6.2 percent -- close to its highest ever level of 6.397 percent reached in August.
"We all known that when our borrowing rate is close to seven percent our debt risks becoming unsustainable. The situation is extraordinarily serious," Nicola Rossi, an opposition senator and economist, told news channel SkyTG24.
"The problem is that Italy is the weak link in the euro chain so we are under particular scrutiny," he said.
At traders IG Index in London, chief market strategist David Jones said: "The decision by Greece to hold a referendum on the bailout is a shock to investors who thought that we were finally nearing the end" of the region's debt crisis.
"It raises the prospect of the crisis dragging on further still, continuing the uncertainty for stock markets. Not surprisingly, some of the biggest casualties ... are the banks."
Adding to weaker sentiment was data from the world's second-biggest economy China showing manufacturing activity slowed last month.
The official purchasing managers' index (PMI) -- based on a survey of 820 manufacturers -- dropped to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement.
Hong Kong shares closed 2.49 percent lower on Tuesday, Tokyo fell 1.70 percent and Sydney lost 1.52 percent.
In later European trading, the dollar dipped to 78.15 yen from 78.16 yen on Monday. Gold prices fell to $1,703.25 an ounce from $1,722.