Leading US shares shed more than 500 points on Monday in the wake of financial turmoil caused by the bankruptcy of Lehman Brothers.
The Dow Jones industrial average lost 504.48 points, or 4.42%, to end at 10,917.51, marking the biggest point fall since the September 2001 attacks.
The Standard & Poor's 500 index shed 4.69% while the Nasdaq composite index was 3.60% lower by close of trade.
The falls came after shares in leading European indexes had ended lower.
Earlier in the day, the UK's FTSE 100 index had closed 3.92% down, while France's Cac 40 index shed 3.78% and Germany's Dax lost 2.74%.
Asian markets were hit by the news with Australian shares down 1.8%.
Several of Asia's major stock exchanges - in Tokyo, Hong Kong, Shanghai and Seoul - were closed for holidays.
But in Singapore the STI dropped 3.3% to hit a two-year low.
And in Taiwan, the benchmark share index closed down 4%, and in India share prices fell by more than 3.35%.
In markets that were trading, banking, insurance and financial sectors suffered most after Lehman Brothers, the fourth-largest investment bank in the US, said it would file for bankruptcy protection.
Financial sector nerves
Insurance giant AIG saw shares shed $6.93, or 57% to $5.21 after earlier reports that it had sought emergency funding from the Federal Reserve to help it rebuild its balance sheet.
Shares in Bank of America, which earlier agreed to buy Merrill Lynch in all-share deal worth $50bn, followed suit, as investors considered the risks of Merrill's portfolio of mortgage-backed assets.
In the UK banking group HBOS closed down 17%, after being 33% lower at one stage on concerns it and rivals face more write-downs and higher funding costs.
HBOS is more reliant than other major UK bank on borrowing in the wholesale markets for funding.
In the light of the fall in the value of its shares, HBOS issued a statement in an attempt to reassure investors.
"HBOS is a strong financial institution. The group has the strongest capital ratio of all the major UK domestic banks.
"As we reported at the interim results, we are comfortable with our funding profile. We have access to a diverse range of funding sources and that hasn't changed," it said.
'Dollar rally unsustainable'
On the London Bullion Market, the price of gold rose to 785.70 dollars per ounce, from 750.25 late on Friday.
Gold was bought as a safe haven and initially knocked the dollar to two-month lows against the yen.
The dollar fell against a number of currencies on concerns about the US financial system's stability, but it got some relief from lower oil prices, with US crude dropping almost $7 at one point to levels not seen since February.
Light, sweet crude dropped $5.47 to settle at $95.71 a barrel on the New York Mercantile Exchange.
Meanwhile, the Bank of England on Monday injected £5bn (6.3bn euros, $9bn) into short-term money markets, and the European Central Bank (ECB) injected 30bn euros into European money markets to keep them going.
Anantha Nageswaran, head of investment research at Bank Julius Baer, said: "The dollar rally over the last two months was unsustainable and it was brought about by short-term liquidation pressures by many hedge funds and because of a mistaken feeling that the US economic numbers had turned the corner."
Lehman Brothers has suffered losses of billions of dollars in the sub-prime crisis, and has seen its share price plummet during recent months.
A consortium of international private sector banks and securities firms announced a new $70bn loan fund, intended for use by financial companies to help ease the credit shortage.
The US Central Bank, the Federal Reserve also made new moves to ease access to emergency credit for struggling financial companies, broadening the types of securities financial institutions can use to obtain emergency loans.