Growth worries dent stock markets
European turmoil outweighed relief over the US bail-out, analysts said.
World stock markets have fallen steeply after government bank bail-outs in the US and Europe failed to stem fears of slower global economic growth.
The key share indexes in the UK, France and Germany had all fallen about 5% by mid-afternoon while on Wall Street the main US markets opened 2.5% lower.
Earlier Asian stocks had taken a hammering from investors.
A failure of government intervention to improve bank's willingness to lend had left markets anxious, said analysts.
This was despite a $700bn (£398bn) US bank bail-out being passed late last week, and efforts by several European countries including Germany and Denmark to boost confidence in their banks.
"The Fed's bail-out plan may have been passed on Friday but so far there's been no real reaction in credit markets and because of this the natural assumption is going to be that the measures won't work, even if such a call is rather premature," said Matt Buckland of CMC Markets.
Stock markets are falling... and it's the troubles of Europe's banks, and the messy response of the authorities, that's to blame
BBC business editor
In an attempt to reassure investors, the President's Working Group on Financial Markets, said on Monday that it was moving quickly to exercise the new powers it has been given as part of the Wall Street rescue package.
The group, which was formed after the 1987 stock market crash, said it would move "with substantial force on a number of fronts".
As one of the first effects of the rescue plan, the Federal Reserve announced that it would start paying interest on the reserves that banks are forced to deposit at the central bank.
Analysts said that Germany's increased 50bn euro ($68bn; £38.7bn) bail-out of Hypo Real Estate, the country's second-biggest commercial property lender, had alarmed investors.
Germany earlier appeared to announce an unlimited guarantee for private savings - though later said this was not the case and had instead given only a "political commitment" that savers would not lose deposits.
However, Denmark had already moved to offer full protection, while Sweden massively increased the level of protection it offered.
The Hypo RE rescue came amid other developments including:
- The Icelandic government agreed measures for the country's banks to sell off some foreign assets in a bid to shore up its entire financial system. Iceland's currency last week plummeted 20% against the dollar and the government was forced to bail out the country's third-largest bank, Glitnir
- Trading in shares of Benelux bank Fortis was suspended - the day BNP Paribas took a controlling interest in the troubled finance group under an emergency deal with the Belgian and Luxembourg governments
- Central banks across Europe - including the ECB and Bank of England - offered more than $74bn to banks in short-term loans in separate efforts aimed at trying to making cash available for the banking sector.
- Spanish Prime Minister Jose Luis Rodriguez Zapatero and French President Nicolas Sarkozy arranged meetings with the heads of their respective country's main banks to discuss the global financial crisis.
In London, the FTSE 100 index had fallen 245 points, or 5%, to a four-year low of 4,734.
Germany's Dax index lost 5.3%, while France's Cac 40 index dropped 5.6%.
And on Wall Street, the Dow Jones fell 2.5% to 10,066 points.
Earlier, Japan's Nikkei index had closed down 4.3%, or 465 points, at 10,473.1 its lowest close since February 2004. Hong Kong's Hang Seng index slid 5%, while key Russian markets slumped by 15%.
Markets in India, China, Australia and Singapore also lost ground, while the main Indonesian market lost 10% - the biggest one-day fall on record.
Trading on Brazil and Russia's key stock markets was temporarily suspended after share prices plummeted 10% and 15% respectively.
The prospect of a slowdown denting energy demand saw oil prices fall further, dipping under $90 a barrel.
In London Brent crude dropped $3.38 to $86.87, while in New York, US light, sweet crude fell $3.85 to $90.05 a barrel.