Debt Crisis: European shares fall as investors fear for economy
European shares lost 3pc of their value today and the euro also sank against the dollar on investor fears about the euro area debt.
A regional election loss for Angela Merkel’s ruling party in Germany also added to the concerns.
Frankfurt's DAX was down nearly 5pc while in Paris the CAC fell 4pc while London was off more than 3pc – Wall Street was closed for Labour Day.
Bank shares also took a hit as investors showed their concerns on the amount of government debt being held by institutions.
The eurozone faces a crucial week when a German constitutional court will rule on claims that Berlin is breaking German law by contributing to bailouts for countries like Ireland, Greece and Portugal.
The European Central Bank meets on Thursday and will decide whether to hold or drop interest rates.
The euro fell across the board, hitting a three-week low.
Pressure also mounted on Italy with yields on bonds up to 5.487pc, the highest level in a month.
Earlier, the head of the International Monetary Fund Christine Lagarde and European Commission boss Jose Manuel Barroso have clashed over the future of the continent’s economy.
IMF chief Christine Lagarde warned that the global economy faces a "threatening downward spiral" as she called on Europe and the US to abandon fiscal austerity measures that constrain growth to move instead to stimulus measures.
But Mr Barroso, who is in New Zealand, has denied the eurozone is heading into another recession despite slowdowns in the regions two biggest economies – Germany and France.
And he added that "the latest forecast by the European Commission shows there will be modest growth."
Meanwhile, Deutsche Bank boss Josef Ackermann has warned that European banks will suffer for years while weaker institutions will fail following the financial crisis.
The head of Germany's top bank described prospects for the financial sector as “rather limited.”
Mr Ackermann was speaking at Frankfurt's annual Banks in Transition conference but he also rejected calls for urgent recapitalisation.
He said forcing capitalisation would “threaten to send the signal that politics has lost faith in the ability of existing measures to succeed.”