In Germany, the DAX-30 Index fell nearly 1 percent to 7,517.99 as banking stocks slid on news that American Home Mortgage Investment Corp. had missed margin calls from its lenders and was considering liquidation.
The company said turbulent conditions in the mortgage market forced it to mark down the value of its portfolio of home loans and loan-backed bonds.
That caused shares to drop as persistent concerns that woes in the U.S. housing loan market could prove a drag on global growth. The U.K. FTSE 100 index fell 1.2 percent to 6,283.70 and the French CAC-40 index lost 1.6 percent to 5,659.26.
In Asia, Japanese stocks sank 2.2 percent to a four-and-half-month low, Hong Kong's market fell 3.2 percent, and South Korean shares plunged 4 percent. Indian stocks also sank 4 percent.
Chinese stocks, which had shrugged off the global market turmoil until now, retreated from record highs. The benchmark Shanghai Composite Index fell 3.8 percent.
Jimmy Yates, a dealer at CMC Markets in London, said the drop in European markets was linked to the subprime mortgage crisis in the United States, particularly in the wake of Tuesday's announcement by American Home Mortgage.
"A lot of this stuff has been talked about and now people are starting to really factor it in and thinking it could have an effect on GDP and a U.S. slowdown," Yates told The Associated Press.
"The knockdown effect on the global economy can never be discounted."
He said traders are curious and cautious about what kind of amounts of money could be involved, adding that some estimates have run as high as $250 billion.
"No one knows what kind of effect it's going to have," he said. "We could be talking massive amounts of money."
Deutsche Bank AG fell more than 2 percent even after its second-quarter profit surged 31 percent on an investment banking business that proved to be solid amid global market jitters.
The bank said its exposure to the subprime mortgage market, or real estate loans made to borrowers with weak credit histories, was not significant.
Similarly, French bank BNP Paribas fell nearly 1.2 percent after posting a 20 percent jump in second-quarter net profit and saying that it is hardly affected by the current subprime mortgage crisis or by tensions in the leveraged buyout market.
Rebecca Engmann Darst of Interactive Brokers said that credit fears trailing the losses in global indices was an ominous sign for U.S. shares.
"Spreading turmoil in the global financial sector on fears of subprime contagion and a generalized credit crunch led Asian stocks sharply lower," she said, adding that Europe's indexes were showing remarkable slides as well.
U.S. stocks zigzagged in early trading Wednesday as Wall Street tried to grapple with continued worries about U.S. home loans and the credit market. The Dow Jones Industrial Average was up 38.77 points to 13268.07 in midmorning trading, after it had fallen earlier in the day fell 0.2 percent to 13,180.04. Broader stock indicators fell.
In Tokyo the Nikkei 225 fell 2.2 percent, to 16,870.98 points, the lowest since March 16. The Korea Composite Stock Price Index, or Kospi, dropped 4 percent to 1,856.45, the lowest close in a month.
In Australia, worries about contagion rose after Fortress Investments Ltd., the high-yield fund manager of Macquarie Bank Ltd., said late Tuesday that investors in its two funds face losses of up to 25 percent, affected by price volatility in the U.S. credit market.
Though its funds aren't directly exposed to U.S. subprime mortgages and Macquarie Bank doesn't have any direct exposure, either, the bank's shares tumbled 10.7 percent, helping drag down Sydney's benchmark S&P/ASX 200 index 3.3 percent.
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