Stocks on both sides of the Atlantic fell amid expectations that lawmakers' talks on cutting the US budget deficit are set to fail, which would trigger automatic spending cuts that might hurt the economic recovery just as it is showing signs of acceleration.
In afternoon trading in New York, the Dow Jones Industrial Average dropped 2.53 per cent, the Standard & Poor's 500 Index shed 2.32 per cent and the Nasdaq Composite Index declined 2.43 per cent.
In the US, a deficit-cutting congressional supercommittee was expected to concede they had failed to reach an agreement after three months of talks over taxes and spending in an effort to cut the deficit.
"People are just wary to commit heavily to the market if you've got a particular day that no particular good news came out over the weekend anywhere - there is virtually no good news and several data points were negative," Rick Bensignor, chief market strategist at Merlin Securities in New York, told Reuters.
A couple of takeovers were announced. Gilead Sciences Inc agreed to buy Pharmasset for US$11 billion in cash, while Alleghany will buy Transatlantic for about US$3.4 billion.