Doubts about Europe's ability to manage its debt hammered markets on Monday, knocking the single currency, driving up bond yields and dragging down equities in Europe and elsewhere.
Wall Street looked set to join in the flight from risk. U.S. stock index futures pointed to losses at the open.
Investors were digesting a block of bad news about the euro zone crisis, a political and fiscal struggle to bring the huge debt in peripheral economies to heel.
Following a three-notch cut of Greek debt by Fitch Ratings on Friday, which pushed the country deeper into junk status, rival Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday.
Markets have generally decoupled Italy from other parts of the euro zone periphery during the crisis, which has led to bailouts for Greece, Ireland and Portugal.
Spanish voters, meanwhile, added to the angst, becoming the latest electorate to punish sitting European governments for the current economic climate.
Investors are increasingly concerned that voter rebellions against austerity plans could cause bailouts and budgetary pact agreements to unravel, leaving large swathes of debt in jeopardy.
The ruling Spanish Socialists were hit by stinging losses in local elections and now face walking a tightrope between voter anger over sky-high unemployment and investor demands for strict austerity measures.
"There's a risk of everything becoming excessively politicized which will be detrimental for the economy," said Carlos Berzosa, professor of applied economy at Madrid's Complutense university.
Investors reacted to the various events with a burst of risk aversion, shifting funds into U.S. government debt, gold and the dollar.
The euro fell to a record low against the generally safe-haven Swiss franc. It was down 1 percent against the dollar and was down 1.2 percent against the yen.
Worries about some form of debt restructuring by Greece was a key element in the sell-off.
If Greece were to restructure, that could prompt Ireland and Portugal to follow with restructurings of their own, Adrian Foster, head of financial markets research for Asia-Pacific for Rabobank International in Hong Kong, said in a research note.
"It is difficult to imagine them proceeding with economically (and politically) painful fiscal austerity whilst Greece gets debt forgiveness," he said.
European shares suffered the same fate as the euro, with the FTSEurofirst 300 index selling of 1.5 percent.
"It's more than Greece now. This is more a reflection of the inability of the EU to sort out anything, and that makes people worry beyond Greece," said Lothar Mentel, chief investment officer at Octopus Investments.
Risk aversion spread beyond Europe. World stocks as measured by MSCI were down 1.2 percent, particularly hit by emerging markets losses. The MSCI emerging market stock index was down more than 2 percent, for a year-to-date loss of more than 3 percent.
Emerging markets, despite the strong economic conditions that some of them enjoy, are still seen as relatively risky investments and therefore sell off when sentiment turns cautious.
Yields on peripheral euro zone bonds rose.
The spread between the yields on 10-year Spanish and Italian bonds and their German counterparts reached their widest levels since January.
Investors, however, bought core euro zone debt and the June Bund future hit its highest level since January.