Traders on Wall Street have had plenty of downbeat data to mull over
Shares in Europe and the US have fallen sharply after more bleak news on the US economy alarmed investors.
The 2.7% fall in December retail sales has sparked fresh fears about the state of the world's largest economy, analysts said.
London's FTSE 100 index closed down by more than 5%, with banks among the biggest fallers.
On Wall Street, the Dow Jones index fell 3% while the main markets in France and Germany lost about 4.5%.
In London, stocks were hit by worries that UK banks could be forced to turn to the government for more capital to cope with rising bad debts.
Barclays slid by more than 14% as it underlined its need for cost-cutting by announcing another 2,100 job cuts. Royal Bank of Scotland lost 18%, while HBOS fell back 13.5%.
The sector was dented further by Germany's biggest bank, Deutsche Bank, which issued a profits warning, saying it made an estimated loss of 4.8bn euros ($6.4bn; £4.4bn) in the fourth quarter of last year.
Will Barclays and others need further capital?
At the same time, Citigroup agreed to sell control of its brokerage business, Smith Barney, to Morgan Stanley to generate much-needed cash.
Growing uncertainty about Citi's future viability drove its shares below $5 - their lowest level since the bank got a government rescue in November.
Another big faller in London was transport giant FirstGroup, after the company said revenues at its Greyhound bus business in the US and Canada had fallen.
And in the FTSE 250 index, the UK's biggest pubs group, Punch Taverns, lost 31% after it said the difficult trading environment meant had forced it to massively increase its rent concessions and beer discounts to struggling landlords.
Discounts not working
US retail sales fell by more than expected in December, official figures have shown, as shoppers cut back on spending over the Christmas period.
Sales fell by 2.7% last month, the Commerce Department said. This followed November's revised fall of 2.1%, which was initially estimated at a 1.8% decline.
It is the sixth month in a row that sales have fallen, as the economic downturn takes its toll on consumers.
Earlier this week, the British Retail Consortium reported the worst sales figures for December since its survey began 14 years ago, despite hefty discounting by stores trying to tempt customers into making purchases.
And the slump in sales on both sides of the Atlantic came despite deep interest cuts by both the Bank of England and the US Federal Reserve.
"Rate cut after rate cut has clearly had little effect on consumers and it's difficult to see any relief for retailers at the moment," said Manoj Ladwa, derivatives broker at ETX Capital.