Debt Crisis: US and European shares hit new lows as Greek tragedy plays out
Fears of a Greek default eroded confidence in banks today, leaving London's leading shares index on track to close below 5,000 for the first time since July 2010.
And in the US, the S&P 500 entered a bear market after the open – it is down over 20pc from its 2011 high.
Eurozone finance ministers delayed a decision as to whether to pay the debt-stricken nation the next tranche of its €110bn bailout money, sparking further doubts that it will keep up with its debt repayments.
They are also considering forcing banks to take bigger losses on Greek debt raising further concerns for already nervous investors.
The FTSE 100 Index fell 3pc, at times slipping below 4,900, extending its abysmal form after its worst quarter for nine years saw nearly 14pc wiped off its value.
Banks were the biggest losers as fears over the sector were heightened when Deutsche Bank issued a profits warning, blaming financial market volatility and more charges on Greek government debt.
And there is growing speculation that Belgian lender Dexia may need to be split up after its debt rating was put under review.
The price of Brent crude oil also fell below $100 a barrel, reflecting growing pessimism about the global economy.
The uncertainty over Greece hit markets around the world, with the Dax in Frankfurt and the CAC 40 in France both down around 3pc, while Asian markets also suffered sell-offs overnight.
Eurozone ministers have cancelled their meeting about the debt-stricken country planned for October 13 after the country admitted it would fail to meet its tough deficit reduction measures.
A decision is not now expected until the second half of the month following a review of Greece's economy.
Greece had previously warned it will ultimately go bankrupt if it stops receiving the bailout money, although it is believed to have enough money for the immediate future.
The losses on world markets were also driven by reports that eurozone finance ministers are planning to ask private bond holders to accept bigger losses on Greece's debt to reduce the pressure on the country.
Meanwhile, French and Belgian governments pledged to underwrite loans to Dexia to shore up confidence in the bank.
Kathleen Brooks of Forex said: "As the EU's high command dallies about how to help Greece and implement fiscal consolidation, member nations have to prop up their banking sectors.
"This is totally dysfunctional, and highlights the challenges faced by the currency bloc as it tries to weather out this crisis."
Michael Hewson, analyst at CMC Markets, said: "The continued uncertainty and instability in Europe continues to act as a cancer on risk appetite."
Deutsche Bank - one of the world's largest banks - said its third quarter earnings would be substantially lower than expected due to market turbulence and more charges on Greek government debt.
Meanwhile, the governments of France, Belgium and Luxembourg vowed to prop up Dexia bank and insure every cent of its deposits as its share price continued to slide on the Brussels Stock Exchange.
The bank may be forced to spin off assets in order to shore up its balance sheet after its credit rating was put under review.
Manoj Ladwa, senior trader at ETX Capital, said: "Action regarding sovereign debt will need to come sooner than later as what began on the periphery of the eurozone seems to be spreading to the core."
Elsewhere, investment bank Goldman Sachs hit sentiment as it forecast a "mild recession" for the eurozone area.
A speech from US Federal Reserve chairman Ben Bernanke had no immediate impact on the US market.
Mr Bernanke suggested the Fed might take more emergency action - such as increasing its quantitative easing programme - to revive the US economy.
But fears over Europe, weak factory order data and doubts over the solvency of American Airlines owner AMR all dampened the mood on the other side of the Atlantic.