Investor sentiment took a hit after France and Germany made it clear to Athens that the country will not receive a cent of the next aid package until after the referendum and it decides whether it wants to stay in the 12-year-old currency bloc.
Banks were the main focus due to their exposure to sovereign debt, with BNP Paribas among the worst hit, down 4.6 per cent, after it reported a bigger-than-expected 2 billion-euro ($2.76 billion) charge on Greek debt.
"There is massive uncertainty, is Greece going to come out of the euro," said Andrea Williams, who manages $2.1 billion in assets for Royal London Asset Management.
"We are trying to avoid exposure to domestic Europe, we were concerned about European growth anyway, but now it is going to be absolutely dreadful. We are trying to avoid anything with over exposure to Italy and Spain."
By 0705 GMT, the pan-European FTSE uro first 300 index of top shares was down 1.4 per cent at 958.53 points.
The damage in Europe continued a trend that started in Asia and Australia on Thursday. Asian shares, commodities and the Australian dollar all fell on Thursday as fears that Europe's debt crisis could unleash financial chaos prompted investors to shed riskier assets in favour of the relative safety of the dollar.
U.S. stock futures also fell, retreating from a Wall Street rebound on Wednesday, as leaders of the world's biggest economies began arriving in France for a G20 summit set to be dominated by the threat of a Greek exit from the euro zone.
Asian stocks dropped 1.8 per cent and European shares were seen making similar losses at the start of trading, while oil, copper and the commodity-linked Aussie fell around 1 per cent and credit markets weakened.
The leaders of France and Germany, angered at Greece's shock move to call a referendum on its latest bailout plan negotiated last week, told Prime Minister George Papandreou on Wednesday that Athens would not receive another cent in EU aid until it decides whether it wants to stay in the euro zone.
"It's clearly a worse situation as it is putting other euro zone members in a corner," said Jeremy Friesen, a commodity strategist at Societe Generale in Hong Kong.
If Greek voters reject the 130 billion euro bailout package, which is conditional on harsh austerity measures, it could lead to a disorderly default, with the fallout affecting European banks and rippling across the global financial system.
Financial bookmakers in London called the FTSE 100 index to open down 1 per cent, while Germany's DAX was seen down 1.7 per cent and France's CAC-40 down 1.4 per cent.
MSCI's broadest index of Asia Pacific shares outside Japan fell 1.7 per cent, while S&P 500 futures traded in Asia lost 1.2 per cent. Wall Street shares had gained more than 1.5 per cent on Wednesday.
Tokyo's financial markets were closed for a public holiday.
As well as watching events at the G20 summit in Cannes, investors were also focused on Frankfurt, where the European Central Bank was holding its first policy meeting under new President Mario Draghi.
Many analysts see the ECB as the only institution with the firepower to calm tensions, and the key question after the meeting — at which no change in interest rates is expected — will be whether it will increase its purchases of bonds issued by debt-ridden euro zone states.
On Wednesday, the U.S. Federal Reserve offered no new stimulus, but said it was mulling the possibility of buying more mortgage debt to spur a struggling recovery.
The euro fell 0.3 per cent to around $1.3710 as investors took sanctuary in the dollar, which rose by a similar margin against a basket of six major currencies.
"We're negative on the euro," said Adarsh Sinha, Asia-Pacific G10 FX strategist at Bank of America Merrill Lynch in Hong Kong. "There are very few scenarios in my mind where the euro can rally significantly."
Adding to the gloomy economic outlook were surveys on Wednesday showing that the downturn in euro zone manufacturing in October was even deeper than previously thought.
"Although further developments in the euro debt saga are likely to trigger more market volatility, a possible slowdown in the real economy, as indicated by the recent release of euro area PMIs, will be more of a concern medium-term," Barclays Capital analysts warned.
The pullback from risk also knocked oil lower, with U.S. crude down 1 per cent at $91.55 a barrel and Brent crude off 0.6 per cent at $108.71.
Copper fell 1.1 per cent on the London Metal Exchange to below $8,000 a tonne.
The Australian dollar , seen as a "risk" currency because it is heavily influenced by expected demand for Australia's natural resources, fell 0.9 per cent to around $1.0248.
In Asian credit markets there was a widening of spreads on the iTraxx Asia ex-Japan investment grade index , which can be used as a gauge of risk appetite.
Gold , which in recent months has largely flipped from a negative to a positive correlation with riskier commodities as safe-haven seekers favour the dollar, fell 0.3 per cent to around $1,733 an ounce. For the latest updates on the stock market, visit Stock Market Today
European shares november 3 2011, commoditidy market nov 3 2011, stock market november 2011, asian stock market nov 3 2011, U.S. stock futures 3/11/2011, Australian dollar nov 3 2011, gold prices november 3 2011, Copper prices november 3 2011, U.S. crude down 3/11/2011, G20 summit in Cannes november 3 2011, Germany's DAX nov 3 2011, France's CAC-40 down 3/11/2011, FTSE 100 nov 3 2011, BNP Paribas stock prices november 3 2011 For the latest updates PRESS CTR + D or visit Stock Market news Today
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