European stocks slid deeper into the red on Tuesday and the euro headed south on rising expectations that Greece was set for a default despite fresh international efforts to resolve the debt crisis.
German Chancellor Angela Merkel sought to ease fears over a possible Greek bankruptcy, saying the 17-country eurozone had to stick together and that an "uncontrolled insolvency" must be avoided.
US President Barack Obama warned overnight that the world economy would remain weak until the eurozone crisis was solved, as market anxiety mounted over debt woes in Greece, Spain and Italy.
After opening higher, European stock markets quickly reversed direction and fell sharply for a second day running.
London's FTSE 100 stocks index dropped 1.02 percent to 5,080.68 points, Frankfurt's DAX 30 index slumped 1.34 percent to 5,006.14 points and in Paris the CAC 40 tumbled 2.27 percent to 2,791.40. Madrid lost 1.19 percent and Milan 1.38 percent.
Shares in French banks plummeted again amid rumours that China was refusing to buy Italian government bonds, dealers said.
BNP Paribas, the bank most exposed to Italian debt, plunged by nearly 10.0 percent in early trading on the Paris stock exchange, with Societe Generale down by 4.0 percent.
Cairn Energy was the biggest faller in London, shedding almost 10.0 percent on news that the British energy explorer was plugging a well off the coast of Greenland -- a blow to its plans of finding crude in the region.
In foreign exchange trade, the euro dropped below $1.36 but was off 10-year lows against the yen struck on Monday.
Speaking to German radio station RBB on Tuesday, Merkel said "the top priority is to avoid an uncontrolled (Greek) insolvency, because that would not just affect Greece, and the danger that it hits everyone -- or at least several countries -- is very big."
She stressed that the eurozone had to remain intact, hinting that if Greece were to leave the group, others would swiftly follow.
"I have made my position very clear that everything must be done to keep the eurozone together politically. Because we would soon have a domino effect," said the chancellor.
Meanwhile in a roundtable interview with Hispanic journalists on Monday, Obama said that the United States was working with European states and authorities to help craft packages for vulnerable economies.
"We will continue to see weaknesses in the world economy, I think, so long as this issue is not resolved," Obama said.
"It will be a significant topic for the G20 meeting that takes place in November," he said, referring to a meeting to be hosted by France.
Obama said that Washington was "deeply engaged" with European nations on solving the eurozone crisis but that ultimately large countries in Europe were going to have to come together to decide how to solve it.
"Greece is obviously the biggest immediate problem. And they're taking some steps to slow the crisis but not solve the crisis," Obama said.
"The bigger problem is what happens in Spain and Italy if the markets keep making a run at those very big countries," he said.