Growing international tension over Israel's offensive in Lebanon has sent world markets tumbling as oil prices crept towards $77 (£42) a barrel.
Israel's offensive in Lebanon follows the kidnapping of Israeli soldiers
In the US, the Nasdaq ended on its lowest level for nine months while the Dow Jones saw treble-digit losses for the second day in a row.
All the major European financial markets fell by 1.6% or more.
Outside the Middle East, further supply worries in Nigeria also pushed oil prices higher.
In New York, a barrel of light sweet crude jumped to $76.70, while London's main Brent contract hit $76.69.
A drop in US oil inventories added to the upward pressure on crude prices.
US stockpiles of crude fell by six million barrels last week, on the back of an increase in demand from motorists for fuel, according to US government figures.
'Fuel to the fire'
In the US, the Nasdaq fell 1.7% to 2,054.11 while the Dow Jones lost 166.89 points, 1.5%, to close on 10,846.29.
Earlier, Europe had taken a hammering with Germany's Dax 30 losing 2%, France's benchmark Cac 40 falling 1.8% and the London FTSE 100 slipped 1.6%.
Israel's military action in Lebanon was one of the key factors affecting the current surge in oil prices, analysts said.
Israel has imposed an air and sea blockade on Lebanon as part of a major offensive after two soldiers were seized by the militant group Hezbollah.
Although neither Israel nor Lebanon are oil producers, the violence has increased tensions in the Middle East, a region which accounts for about a quarter of the world's oil.
Meanwhile, reports of two explosions at a pipeline run by Italy's Agip in Nigeria added to investor worries.
The Italian firm denied that the blasts in Nigeria's Bayelsa state were the result of sabotage.
However, the incident comes as almost a quarter of normal oil output in Africa's largest oil producer has been shut down because of rebel attacks.
"Geopolitical risk is out of control," said Mitsubishi risk manager Tony Nunan. "There's a pipeline attack in Nigeria, Israel is taking a strong stance and that's adding fuel to the fire."
Separately, Iran's President Mahmoud Ahmadinejad warned that his country would not abandon its efforts to develop nuclear technology, despite the likelihood that the case will be referred back to the UN Security Council.
Iran is the world's fourth largest oil exporter, and the Islamic state's nuclear standoff with the international community has been another key element in recent surging crude prices.