Shares in miners, autos and luxury good groups, which rely heavily on Chinese demand, fell sharply for a second day.
London's benchmark FTSE 100 index dropped one percent to stand at 6,597.75 points around midday in the capital, after the latest British unemployment data came in at 5.6 percent, unchanged from last month.
Frankfurt's DAX 30 slid 2.01 per cent to 11,066.93 points and the CAC 40 in Paris shed 1.97 per cent to 4,998.65 compared with yesterday's close.
"Once again, the investor sentiment has been hit hard by events happening in China," said Fawad Razaqzada, analyst at investment group Forex.Com.
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"The market has reacted to the Chinese data and... Moves to devalue its currency as a sign that the world's second largest economy is struggling."
Razaqzada added that "essentially, a weaker yuan should help to support exports and hopefully revive growth."
Beijing's surprise devaluation of the yuan by 1.86 per cent yesterday had already sent ripples through global financial markets, prompting a wave of selling in equities and commodities and buffeting Asia-Pacific currencies.
At the same time, three key indicators released by China all came in below market expectations.
Aside from China, focus was firmly on Greece, with Athens and its creditors set to put the finishing touches to a third international bailout agreement aimed at saving the eurozone nation's stricken economy from collapse.
The 400-page text has already been submitted to the Greek parliament for a crucial vote on ratifying the deal, which sets out the fiscal and other policy measures that Athens must adopt in exchange for the 85 billion euro (USD 94 billion) lifeline.
The Greek economy, which only crawled out of a six-year recession in 2014, will shrink 2.3 per cent in 2015 and another 1.3 per cent in 2016, the sources said, as the authorities push through a bailout aimed at helping Athens stay in the eurozone.
Athens' main stocks index was down 1.47 per cent at 694.62 points in afternoon dealing.