Fears of a Europe-wide recession undermining political will to tackle the region's debt crisis gripped financial markets today, sending shares and the single currency lower and driving demand for safe-haven assets.
US stocks were also poised to open lower on Wall Street.
The economic outlook for Europe was hurt by poor flash Purchasing Manager's Indexes (PMIs) for April, which are a guide to future activity. The reports for the euro zone, Germany and France pointed to a much faster rate of economic contraction across the debt-laden region than had been expected.
The gloomier view came as the Dutch government, a close ally to Germany in calling for tougher austerity measures to fight the crisis, was preparing to resign because of a crisis over budget cuts, according to two broadcasters.
Investors were also absorbing the implications of the victory in the first round of France's presidential poll of the Socialist Francois Hollande, who has promised to renegotiate a European budget pact.
"It's beginning to look like the perfect storm," said Stewart Richardson, chief investment officer at RMG.
"If there is a Dutch election coming up soon it just adds to the whole cocktail of worries for the market."
Voters in Greece also go to the polls on May 6th, where the only two major parties that back the EU/IMF bailout plan are just ahead according to the latest polling.
The single currency dropped 0.35 per cent to $1.3150, down from a two-week high on Friday, and was expected to stay under pressure before key debt auctions due later this week by Italy and the Netherlands.
The French and Dutch developments overshadowed the weekend agreement by the world's major economies to provide an additional $430 billion in new crisis-fighting funds to protect the global economy from Europe's problems.
Europe's top shares were bearing the brunt of investors' fears after a lower start on data from China showing factory output in its economy was still contracting. The data also suggested the downtrend may be over.
The FTSE Eurofirst index of top European shares fell 1.9 per cent to 1026.27 points, having just posted its best week in a month. Banks .SX7P, which are exposed to Europe's debt problems, were down 3 per cent, led by Amsterdam-listed ING Groep, which fell 7.5 per cent.
April's PMI for the euro zone's dominant service sector fell to 47.9 from 49.2 in March - a five-month low and below forecasts in a Reuters poll of more than 40 economists which projected a rise to 49.3.
But the impact of the data was increased by a separate PMI for Germany which showed Europe's largest economy had seen its export-oriented manufacturing sector shrink at the fastest pace in nearly three years in April.
"They're all telling us that the (euro zone) economy has lost a lot of momentum. It's not even true now to say this is a problem of the periphery, because the core economies would appear to be suffering too," said Peter Dixon, global equities economist at Commerzbank.
The news sent safe-haven German government bond yields to record lows of 1.584 per cent, while yields on the ultimate safety play, 10-year US Treasury notes, fell 4 basis points to a seven-week low of 1.921 per cent.
Yields on most other peripheral euro zone debt worsened with Spain's 10-year bond yield jumping back above six per cent.
The cost of insuring Dutch debt against default jumped to its highest since January and the premium investors demand to hold the bonds, rather than equivalent German benchmarks, surged to the highest level in three years.
The mixed signals on China's likely demand for metals in the latest HSBC PMI was not enough to offset the worries over Europe in the commodities market, where three-month copper on the London Metal Exchange fell 1.8 per cent $8,043.50 a tonne.
Gold prices eased towards $1,630 an ounce, extending the two per cent losses it has posted so far this month.
Gold watchers are expected to turn their attention shortly to the Federal Reserve's two-day policy meeting from tomorrow, at which the potential for more monetary easing is set to be addressed
