Portugal is the latest country to prompt worry about European debt
European shares fell sharply for the second consecutive day as concerns about some governments' debt levels continued to weigh on investors.
In Paris, the Cac index closed down 3.5% and German and UK markets also lost ground.
It came as new questions were raised about European countries' ability to control their swollen budget deficits.
In Portugal, opposition parties defeated a government austerity plan that would have cut spending.
Instead, they passed their own bill, allowing the country's autonomous regions to rack up even more debt.
Investors worry that if regulators can't help stem problems now, they could end up snowballing and becoming an ever bigger spread elsewhere
Nicholas Colas, ConvergEx
Concerns about these deficits are undermining faith in the region's euro currency - with Greece and Spain also grappling with massive budget shortfalls.
And growing budget deficits also mean that governments cannot afford to spend much more on boosting their economies.
There was a sense that the European Central Bank did not have the situation under control, said Nicholas Colas, chief market strategist at ConvergEx.
"It's that void that concerns people, he said. "Investors worry that if regulators can't help stem problems now, they could end up snowballing and becoming an every bigger spread elsewhere."
Greece has outlined ambitious plans to reduce its deficit dramatically over the next two years, but doubts remain about whether its government will be able to deliver such swingeing cuts.
"It has been a worry for Greece for weeks, but it is now spreading like wildfire, driving equity markets lower, causing further concerns about medium-term growth prospects," said Kit Juckes at ECU Group.
Downbeat US jobs data added to gloomy predictions for the pace of recovery in the world's largest economy.
Official data showed the US unemployment rate falling to 9.7% in January, from 10% in December, but this did little to ease the sell-off in shares.
This was exacerbated by separate data suggesting that employers axed 20,000 jobs last month, more than the 5,000 analysts expected.
However the Dow Jones pulled back in late trading to finish slightly ahead having been almost 170 points down at one point.
Earlier, London and Germany's main markets lost more than 1.5% each, Japan's Nikkei index slumped almost 3%, while stock markets in Hong Kong, Korea and China all fell sharply.
Concerns over debt levels are also tapping into wider fears about the strength of the global economy, analysts said.
Some investors believe the recovery is the direct result of governments pumping billions of dollars into their economies to stimulate demand.
When they stop pumping money in, they fear, economies will begin to shrink again.
Growing budget deficits mean that governments cannot afford to spend much more on boosting their economies.
"The real concern is that the whole recovery is nothing more than poorly-directed government stimulus which has simply had the effect of boosting asset prices," said David Morrison at GFT.