Fears of a double dip recession have pushed the euro to a new four-year low against the dollar and sparked more jitters on global stock markets.
Markets were volatile yesterday due to concerns over Europe's debt woes after Hungarian officials signalled that the nation was at risk of a Greek-style fiscal crisis.
Investors are worried that already weakened European banks could be punished heavily if sovereign debt contagion spreads to other countries.
The euro hit a new four-year low of 1.1873 against the US dollar, prompting the EU's Economic Affairs Commissioner Olli Rehn to voice concern at the speed of its decline. The single currency also lost further ground against the pound, which is now trading above 1.21 - its highest level since November 2008.
The FTSE closed down 1.1% after a nervy trading session, while France's Cac 40 ended 1.2% lower. In Germany, where the cabinet agreed a major austerity plan, the Dax closed 0.6% down.
Markets in Asia had earlier suffered sharp falls after Friday's disappointing US jobs numbers.
In early trading yesterday, the Dow Jones Industrial Average was still below the psychologically important 10,000 mark.
IG Index's head of research, Anthony Grech, said markets "clearly remain edgy".
"There's certainly little respite to be found in the markets right now with concerns over the global economic outlook weighing," he said.
Meanwhile oil prices have slumped to near $70 a barrel after last week's poor jobs data cast recovery doubts over the world's biggest economy, causing oil stocks to plummet.
News that US employers added a worse than expected 431,000 jobs in May knocked already fragile confidence and Hungary's woes added to concerns of a return to recession.
Hungary is part of the EU, but keeps its national currency, the forint, which dropped around 5% last week.
The country's state secretary sought to play down comments likening Hungary to Greece but added that emergency cabinet meetings had taken place over the weekend and yesterday.
Phil McHugh, senior executive dealer at foreign exchange firm Currencies Direct, said there was little hope of a euro rebound.
"Within a very short space of time, the euro has swung from stable to questionable and talk of a euro collapse with countries leaving the single currency is no longer taboo."