MSCI's main world stock index, a benchmark gauge of stock markets globally, sank 2.6 percent, falling below its 2007 bottom to lows last seen in December 2006. Its emerging market equities counterpart lost more than 5 percent.
Meanwhile, the spread between emerging market bond yields and U.S. Treasury yields, a key gauge of risk appetite, was just off its widest in two years.
"A mixture of weak global economic data, poor corporate data, increasing fears about the possibility of a recession ... have left investors drowning in a sea of red," said Henk Potts, equity strategist at Barclays Stockbrokers.
The pan-European FTSEurofirst 300 was down 4.2 percent, taking its 2008 year-to-date losses to more than 13 percent. Japan's benchmark Nikkei average earlier lost 3.86 percent to close at a two-year low and MSCI's main emerging market stocks benchmark was down 3.9 percent.
"Risk aversion is widespread as the market thinks (the economic downturn) is not just a U.S. centric story," said Paul Robson, currency strategist at RBS Global Banking.
U.S. stock markets were closed on Monday for a holiday, but U.S. stock index futures were down sharply suggesting investors were not putting much hope on Wall Street leading a rebound when it returns to business.
Investors in Asia and Europe were carrying through from last week's concern on Wall Street that a fiscal stimulus proposed by President George W. Bush would not be enough to stop the U.S. economy from falling into recession.
Bush called for a package worth up to $150 billion in tax cuts and other measures.
Stock markets have been in full retreat this year over the economic fears. The broad U.S. S&P index had its biggest weekly fall since July 2002 last week.
Many indexes are now more than 20 percent below their recent cycle peaks, a traditional sign that what is going on is not just a correction but the start of a bear market.