SHARES fell from Delhi to Dublin, gold skirted with new records and oil touched a two-and-a-half-year high in New York as soldiers deserted Libyan leader Muammar Gaddafi's government yesterday and a crackdown on anti-government demonstrators saw hundreds killed.
Chinese authorities blocked foreign news reports on protests to resist any movement toward pro-democracy revolts in the world's second largest economy.
The main fear driving down shares and pushing up oil was concern that riots in Libya could spread to Algeria, Kuwait or the United Arab Emirates in the coming days.
Analysts and investors have also been growing increasingly concerned that tensions in Bahrain could spill over the border into Saudi Arabia.
"It's like one of those Australian bushfires; once it takes hold, it's very difficult to put out," said Michael Hewson, an analyst at CMC Markets. "Until the situation in the Middle East settles down, you are going to have very wild price swings."
European stocks retreated for a third day, overshadowing a jump in US consumer confidence that would normally have sent markets shooting upwards.
Airlines were particularly badly hit because political unrest will dampen demand for travel and raise fuel costs.
Air France-KLM fell 3pc. Ryanair extended Monday's 3.5pc decline by falling another 1pc to €3.49. Aer Lingus was down 1pc.
The Stoxx Europe 600 Index suffered the biggest three-day decline since November as national benchmark indexes declined in all 18 western European markets, except Portugal.
The FTSE 100 Index fell 0.3pc and France's CAC 40 sank 1.2pc. Greece's ASE Index slid 2.9pc, while the ISEQ closed down 1.1pc. Gold for April delivery rose 0.9pc to $1,401.10 an ounce.
Shares among the worst hit included Impregilo; Italy's largest construction company lost 2.1pc. The company has €1bn of projects in Libya.
US stocks also tumbled, leaving the Standard & Poor's 500 Index heading for its biggest drop since August last night.
The same trends seen in Europe were evident across the Atlantic. Airlines such as Continental and AMR retreated more than 6.5pc. Oil companies such as Exxon Mobil and Chevron rallied as oil rose.
The political protests in Libya and elsewhere add "stagflationary winds" to the global economy, according to Mohamed El-Erian, chief executive officer at Pimco. Higher prices and shrunken markets add to the "new normal" that Western nations face, Mr El-Erian added.