World shares fell on Wednesday after a surprise move by Germany to ban some types of short-selling of financial products.
Bans on short selling have been introduced in recent times of financial instability by both the UK and US.
And there were fears the Berlin move to limit short-selling could indicate more bad news lurking in the eurozone.
That in turn has led to uncertainty, as investors mull the impact of any eurozone instability on wider markets.
Key share indexes in London, Paris, Frankfurt lost close to 3%. On Wall Street the Dow Jones fell by 0.63%.
Earlier, the euro hit another a four-year low against the dollar. It fell to $1.214 before recovering to $1.239.
In London the FTSE was down by 2.8% at 5158.08 points, and the falls were mirrored by drops in France and Germany.
At the close in Paris the Cac 40 was 2.9% lower at 3,511.67, and in Germany the Dax closed behind by 2.7%, at 5,988.67.
Some analysts believe the German government made the short-selling move after domestic pressure on Chancellor Angela Merkel, who has faced criticism over her response to the Greek debt crisis.
On Wednesday in a debate about Germany's part in the multi-billion euro bail-out of Greece she warned politicians that strict financial regulation was needed to ensure the survival of the eurozone.
But her comments to the German parliament that the "current crisis" facing the euro was "the biggest test Europe has faced in decades" were seen as undermining rather than helping the single currency.
However, while the EU has said other national regulators should follow Germany's lead, BBC business editor Robert Peston said that while some countries may impose similar bans but there was no sign of the larger economies doing so.
The German financial regulator has banned traders in the country from "naked" short-selling of euro-denominated government bonds and of shares in the country's 10 most important financial institutions.
Short-sellers usually borrow shares, sell them, then buy them back when the stock falls and return them to the lender, keeping the difference in price.
"Naked" short selling occurs when a trader sells a financial instrument that has not yet been borrowed.
Robert Peston said the regulator saw a ban on the shorting of government bonds - or debt - as an attempt to stop "what it would see as mischievous bets by investors that the financial difficulties of the likes of Greece and Portugal will worsen".
"It thinks that such bets are what force down the price of Greek and Portuguese government bonds, which then spook investors, and make it much more difficult and expensive for the likes of the Greek and Portuguese governments to borrow vital new money," he added.
The German ban will run from 19 May to 31 March 2011. It will also apply to the use of credit derivatives to bet on a fall in the value of the debt of a eurozone government, unless the investor owns some of the relevant debt.
Credit default swaps are financial derivatives that provide insurance for losses if a borrower goes bankrupt, and have become a lucrative trading market.
Germany's market regulator, Bafin, said that the "extraordinary volatility of the bonds of eurozone states" had justified the short-selling ban.
However, many are questioning whether Bafin's actions will have much impact unless other regulators do the same, given that the trading of government bonds and bank shares is a global business.
European Commission President Jose Manuel Barroso said on Wednesday that other regulators should take similar action.
"We are in agreement with Germany on the need to halt the abusive use of naked short selling," he said.
Earlier the EU commissioner for the internal market and financial regulation, Michel Barnier, said a task force was already looking into issues including naked selling.
Greece's Prime Minister George Papandreou has regularly claimed that traders betting on Greek government bonds had added to the woes of his debt-hit country.
And he warned that failing to control such "speculators" could cause international conflict.
"If policy does not hold sway and we simply let markets and ultimately forces behind markets take the decisions, we will go towards a world of great flux and possible crises, even conflict," he said.
Pressure on euro
Mrs Merkel made her comments on the euro "crisis" as she defended Germany's contribution to a near trillion-dollar package to prevent the spread of troubles suffered by debt-ridden Greece.
She said Europe needed a "stability culture" to ensure the survival of the Euro.
Currency expert Jeremy Stretch of Rabobank said that while Mrs Merkel needed to portray a bleak picture of the state European economy to MPs in Germany, the negative sentiment was being picked up by traders.
"There is scope for further downward pressure on the euro in the short to medium term," he added.
Meanwhile, US regulators have proposed new trading restrictions to try to avoid a repeat of the plunge in values suffered earlier this month.
On 6 May, the market fall quickly spread out of control, and so the Securities and Exchange Commission (SEC) is now proposing so-called "circuit breakers".
These would halt trading in a stock for five minutes if it fell more than 10% in five minutes.
The new rules would apply to all stocks in the Standard & Poor's 500 index.