Global equities fell the most in more than three months and the euro slumped on Tuesday on a new round of worries that Greece may not meet its deadline for a debt restructuring.
Concerns about the strength of the global economy also weighed on markets.
Brazil, which is South America's largest economy and has been one of the world's most dynamic emerging markets, reported weak growth for 2011 that raised fears it is slpping into a new era of mediocre performance. That came a day after China cut its growth forecast and data indicated that Europe is likely to fall back into recession.
Fears that Greece and its bond holders may not meet Thursday's deadline for Athens to receive critically important bailout funds were rekindled after the main bond-holders group said a disorderly default would cause more than a trillion euros of damage to the euro zone and could leave Italy and Spain dependent on outside help to stop any contagion.
The fears about Greece drove up prices of safe-haven US and German government bonds. Gold fell more than 2% as the dollar strengthened against the euro.
"While European developments are probably the main influence on market moves, a more cautious global economic outlook is also playing a role after China cut its GDP growth target" on Monday, said Vassili Serebriakov, a currency strategist at Wells Fargo in New York.
There were also increased concerns about the path of Europe's economy. The euro zone in the final months of 2011 suffered from a collapse in household spending, exports and manufacturing, the European Union reported on
Tuesday. The latest data confirmed the EU's estimate of last month that output in the zone shrank 0.3% in the October-to-December period from the third quarter.
MSCI's all-country world equity index fell 2.1%, its biggest one-day drop since late November.
The Dow Jones industrial average closed down 203.66 points, or 1.57%, at 12,759.15. The Standard & Poor's 500 Index finished down 20.97 points, or 1.54%, at 1,343.36. The Nasdaq Composite Index ended down 40.16 points, or 1.36%, at 2,910.32.
The three US equity indexes recorded their biggest one-day percentage drop this year.
Traders sold the stocks of large banks on concerns about their exposure to Greece. The KBW bank index fell 2.7%. Among major US banks, Morgan Stanley fell 5.3% to $17.32, its lowest level in seven weeks.
Materials stocks fell as anxiety over slowing demand for oil and raw materials, especially from China and other major exporters, put a drag on commodity prices. Aluminum producer Alcoa Inc. <AA.N> shed 4% to $9.47, the lowest level since Jan 11.
"The concern in the market is the realization that China is affected by Europe as much as anyone else is," said Art Hogan, managing director of Lazard Capital Markets in New York.
The FTSEurofirst 300 index of top European shares posted its lowest close in a month, finishing down 2.6% at 1,052.11.
In the currency market, the euro fell 0.8% against the dollar to $1.3114, its lowest level in 2-1/2 weeks, while the dollar index was up 0.7% at 79.82, its highest since February 16.
Benchmark 10-year Treasury notes rose 16/32 in price to 100-14/32, their yield of 1.95%. German Bund futures were up 47 basis points at 140.30 after setting a contract high of 140.48 earlier.
Oil prices fell from recent highs as news of higher output from Iraq and Saudi Arabia mitigated fears over reduced supply from Iran, which might retaliate against US sanctions.
Brent crude oil futures for April delivery settled down $1.82 or 1.47% at $121.98 a barrel. In New York, the April NYMEX crude contract settled off $2.02, or 1.89%, at $104.70 a barrel.
Spot gold prices continued to pare recent gains to trade down 1.9% at $1,673.89 an ounce, the lowest in about five weeks.
Gold has recently failed to benefit from the safe-haven flows that helped push it to record highs last year as investors have sought the safety of the dollar instead.
