The Milan stock market however pulled back dramatically from sharp early losses to trade almost flat in midday trade, as Italy's finance minister quit talks with his EU counterparts to work on his country's austerity plans.
The London stock market shed 1.51 percent, Frankfurt slumped 2.06 percent, Paris plunged 2.36 percent and Madrid dropped 1.73 percent approaching the half-way stage. All markets had been under strong pressure from the debt crisis on Monday
Wall Street stocks slumped overnight, also hit by a weak US jobs market, while markets finished sharply lower across Asia on Tuesday.
The European single currency tumbled to a four-month low of $1.3837 in London foreign exchange deals before pulling back to $1.3944.
Eurozone members were holding further debt talks on Tuesday, one day after agreeing to strengthen a multi-billion-dollar fund to prevent Europe's debt woes engulfing other states.
But investors were increasingly concerned that political leaders and bankers gathered in Brussels were unable to agree on how to avert an outright default by Greece.
Analysts have long forewarned that the Greek crisis could spread to heavily-indebted Italy and Spain -- the third and fourth-biggest economies in the European Union.
"I am returning to Rome to complete my austerity plan," Italy's finance minister Giulio Tremonti told journalists in Brussels on Tuesday as finance ministers from the 27-nation EU discussed ways to stem a debt contagion crisis.
Lee Hardman, an economist at The Bank of Tokyo-Mitsubishi UFJ, noted: "It has long been assumed that as long as Greece, Portugal, and Ireland remained the only eurozone countries to fall into trouble, the situation was manageable with spill-over effects likely to prove negligible.”However, the sharp collapse in investor confidence in Italian and Spanish government debt over the past week has set alarm bells ringing."
Borrowing costs for the Italian and Spanish governments rose sharply further on Tuesday, and borrowing costs for Greece also edged up.
Italian banking shares were also hit hard, with Unaccredited shedding 7.11% and Intesa Sanpaolo dropping 6.62% before rebounding sharply.
"This is as much a banking crisis as a sovereign debt crisis," said Neil MacKinnon, an economist at VTB Capital.
"Policymakers need to address mechanisms that allow for both debt restructuring and bank recapitalisation. In the interim, without a coherent policy response, a disorderly and volatile period looks set to continue."
Europe's troubles weighed on Asian stocks, with Tokyo closing down 1.43 percent on Tuesday. Sydney shed 1.90 percent and Seoul tumbled 2.20 percent.
Copyright AFP (Agence France-Presse), 2011