Global equities sank and the dollar firmed against the euro on Tuesday as investors focused on weakness in the world economy and eurozone tensions, while awaiting progress over a US debt deal.
London's benchmark FTSE 100 index of leading shares fell 0.37 percent in morning trading, Frankfurt slid 0.49 percent and Paris retreated 0.29 percent. Madrid fell by 0.40 percent and Milan lost 0.81 percent.
Asian markets also stumbled amid stubborn concern that the United States' credit rating could be downgraded for the first time in history despite US lawmakers having agreed a plan to avert a default.
Hong Kong closed down 1.07 percent, Tokyo sank 1.21 percent, Seoul slumped 2.35 percent and Shanghai shed 0.91 percent.
"So much for the relief rally that was supposed to occur on the back of the proposed debt deal," said Chris Weston, an analyst at IG Markets trading group.
"The focus has now shifted to the global economy with manufacturing deteriorating across most global economies."
European equities and the euro were also hit by new worries over the plight of debt-laden eurozone member nations Italy and Spain.
The pair came under fresh pressure on Tuesday on financial markets as nervous investors sold down their bonds on concerns that their debt problems will only get worse as economic growth slows.
The European single currency sank as low as $1.4158, which was the lowest level since July 21. It later stood at $1.4217 in London deals, down from $1.4248 late in New York on Monday.
Tuesday's stock market losses meanwhile came one day after an eleventh-hour deal had been struck between the White House and party leaders to raise the country's debt ceiling and avoid a catastrophic default on US sovereign debt.
The agreement, approved by the House of Representatives late on Monday, is expected to pass in the Senate on Tuesday.
"The dollar has staged a rebound this morning after the House of Representatives passed a deal to extend the US's debt ceiling and implement budget cuts of at least $2.1 trillion over the next 10 years," said research director Kathleen Brooks at Forex.com trading group.
"The House was the more difficult roadblock for the bill to pass; it is now expected to pass the Senate in a vote later today."
Adding to traders' woes was a raft of weak figures from the United States and other major economies.
"Having become distracted by the consequences of a possible US debt default over the past weeks, last night's vote by the House of Representatives to pass the debt ceiling legislation should go some way to drawing a line under the matter with only a Senate vote to come," said CMC Markets analyst Michael Hewson.
"This means markets have become more able to focus on the more mundane matters of economic data, not only in Europe and the United States, but also in Asia as well."
The US manufacturing sector was flat in July, according to a closely watched index released Monday, in another sign of how the economy has stalled.
The Institute of Supply Management's indexed survey of purchasing managers was at 50.9, down from 55.3 the previous month. A reading above 50 indicates expansion.
The figures came days after the US revealed that the economy grew by only 1.3 percent in the second quarter, after 0.4 percent in the first -- the weakest growth since it emerged from recession two years ago.