Spanish prime minister Mariano Rajoy was forced to deny involvement in a corruption scandal which has led to calls for his resignation, while in Italy new polls showed Silvio Berlusconi gaining ground before elections this month. Investors fear the former Italian prime minister's promise to repeal an unpopular property tax could increase his support, leading to a hung parliament and a move away from the reforms implemented by the regime run by technocrat Mario Monti.
The recent global market rally came to a sudden halt, with a sell-off across the board. In London the FTSE 100 finished down 100.40 points at 6246.84, its biggest one-day points fall since July 2012, with £25bn wiped off the value of Britain's top companies.
Spain's Ibex ended 3.77% lower at 7919.6, while Italy's FTSE MIB fell 4.5% to 16,539. Germany's Dax dropped 2.49% to 7638.23, and France's Cac closed 3% lower at 3659.91.
In the US, the Dow Jones Industrial Average also came under pressure, losing 140 points, almost 1%, in early trading.
In the bond markets, Spanish yields rose 23 basis points and Italian ones climbed 15 basis points as investors reduced their exposure to both countries. But at 5.45% and 4.48% respectively, the yields were still well below the 7% widely seen as the danger level.
The euro lost over 0.5% against the dollar, falling to $1.3554. The single currency fell nearly 1% against the pound to 85.9p after hitting a 15-month high last week.