Goldman Sachs cut its forecasts for global economic growth, oil and copper, further unnerving investors, who were already dreading the impact of an imminent Greek sovereign debt default.
Britain's FTSE sank 2.6 per cent, France's CAC 40 2.8 per cent, and Germany's DAX 3.3 per cent. Japan's Nikkei fell 1.1 per cent, while Hong Kong's Hang Seng lost 3.4 per cent.
Dow futures were down 131 points, or 1.2 per cent, at 10,459, while S&P 500 futures lost 7.10 points, or 0.7 per cent, falling to 1,079.20.
Story continues below advertisement
Economists at Goldman Sachs said they expect the euro zone to slip into recession, beginning in the fourth quarter, and cut their 2012 growth forecast for the United States to 1.4 per cent from 2 per cent.
The world economy will probably expand 3.8 per cent this year and 3.5 per cent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in a report.
Goldman, regarded as one of the more bullish banks on commodities, also lowered its Brent crude oil price outlook for 2012 from $130 (U.S.) to $120 per barrel and cut its copper price forecast from $10,790 to $9,200 a tonne. Goldman previously had the highest Brent 2012 forecast of $130 a barrel in the latest Reuters monthly oil poll, well above an average of $106.8 a barrel next year.
November Nymex West Texas Intermediate oil slid $1.28 a barrel to $76.30.
Story continues below advertisement
Copper for three month delivery on the London Metal Exchange fell 0.6 per cent to $6,833 a tonne, its fifth day of declines.
Mining stocks took another hit as Credit Suisse cut its target prices for leading mining companies.
10-year Bund yields fell 8 basis points to hover near record lows at 1.74 per cent.
Gold rose 0.6 per cent to $1,667.80 an ounce.
Story continues below advertisement
Adding to jitters was a profit warning from Deutsche Bank, which said that it could no longer reach its full-year target due to market turbulence caused by the deepening debt crisis and more charges on Greek government debt.
Euro zone leaders will likely boost the firepower of their bailout fund at a summit later this month, Belgium's finance minister said, as a push to impose larger losses on Greece's private creditors appeared to be gaining more steam.
European ministers delayed a decision late Monday on paying out a crucial aid installment to Athens until the end of the month. Greece has said that without the 8-billion euros, it will start running out of money by mid-October. Eurogroup chairman Jean-Claude Juncker insisted that Athens could continue paying its bills as long as it gets the money in November.