Frankfurt's DAX dived more than three percent in early deals after Asia's main indices closed down over one percent, as the share prices of Tokyo's exporters were slammed by a strong yen, traders said.
Wall Street gave up early gains to close little changed overnight ahead of US inflation and homes sales data due Thursday, while safe haven investment gold headed back towards $1,800 an ounce.
In early European stocks trade, London's FTSE 100 index was down 2.0 percent, Frankfurt shed 3.18 percent, Paris lost 2.33 percent, Madrid retreated 2.10 percent and Milan slumped 3.01 percent, with banking stocks hit hard.
Markets are fearful of a return to recession, while fresh plans to tackle the eurozone debt crisis have failed to win over investors, who brushed off Tuesday's summit meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel.
Traders also dismissed the pair's proposal for a Europe-wide tax on financial transactions as old hat, likely to be ineffective at best and at worst, to drive business out of Europe into other centres.
US Vice President Joe Biden, starting a visit to China under a cloud of criticism over the United States' own debt crisis, told his hosts Thursday that the two nations held the key to global economic stability.
"I am absolutely confident that the economic stability of the world rests in no small part on cooperation between the United States and China," Biden told his counterpart Xi Jinping, who is set to succeed President Hu Jintao in 2013.
"It affects every country from your neighbour to the north, to Argentina in the southern tip of South America. It is the key, in my view, to global economic stability."
In foreign exchange deals Thursday, the euro fell to $1.4405 from $1.4426 late in New York on Wednesday. The dollar edged up to 76.60 yen from 76.54 yen.
Despite falling, the Japanese currency remains strong and is hurting Japan's exporters, as evidenced by data Thursday showing the country's exports fell for a fifth straight month in July.
Exports were down 3.3 percent from a year ago to 5.78 trillion yen ($75.4 billion), the Finance Ministry said.
"With growth in the advanced economies currently running at close to stall speed there is a heightened risk that some major economies may fall back into recession if hit by a negative shock to growth," said Lee Hardman, currency economist at The Bank of Tokyo-Mitsubishi UFJ.
"The Japanese economy will not prove immune to the global slowdown given its heavy reliance on external demand."
Asian stock markets meanwhile closed lower, with Tokyo down 1.25 percent to record its lowest finish since March 15, which was four days after Japan was hit by an earthquake and tsunami that spiralled into a nuclear disaster.
Elsewhere across the region on Thursday, Sydney stocks shed 1.22 percent, Seoul dropped 1.70 percent and Hong Kong slid 1.34 percent.
On Wall Street, the Dow Jones Industrial Average closed up 0.04 percent on Thursday, while the broad-market S&P 500 added 0.09 percent and the tech-heavy Nasdaq Composite shed 0.47 percent.
Copyright AFP (Agence France-Presse), 2011