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European shares opened down 1.2% and euro zone periphery bonds tumbled after two high profile government resignations in two days threatened to plunge Portugal into a political crisis.
Portugal's bond yields surged more than 1 percentage point to 8%. Spanish, Italian yields jumped too while nervousness over the state of Greece's next tranche of bail-out money also caused jitters.
"With disorder and uncertainty over the political situation in Egypt threatening stability in the Middle East, and a Greek deadline looming to prove it can action its bail-out conditions before receiving the next tranche of aid, volatility is likely to be high," Mark Ward, head of trading at Sanlam Securities, said.
It came after Asian stock markets had dropped overnight as official figures showed that growth in China's services sector sagged to its weakest pace in nine months in June, adding to signs of a slowdown in the world's second-largest economy.
The US dollar hit a one-month high against a basket of major currencies, staying firm after a recent string of generally solid US economic data supported the view that the Federal Reserve could scale back its monetary stimulus later this year.
The dollar index, which measures the greenback's value against a basket of major currencies, rose to as high as 83.635, its highest level since late May, while the troubles in Portugal left the euro at its lowest level in a month.
In commodities markets, oil was hovering around $105 a barrel, a 14-month high, as political turmoil in Egypt where the army is looking to remove the president, threatened to destabilise the Middle East and disrupt oil supplies.
