"Just as everyone was beginning to see light at the end of the tunnel, the European crisis seems to have got worse overnight," IG Markets analyst Stan Shamu said in Sydney, where stocks dived more than three percent.
Investors in Asia took succour on Wednesday from Italian Prime Minister Silvio Berlusconi's vow to resign once credible economic reforms are in place by the end of the month.
But in Europe and the United States, markets took flight at the prospect of a long bout of political uncertainty in Italy to compound the deepening debt crisis in Greece, where leaders are bickering about a new government.
On Wall Street, the Dow Jones Industrial Average fell 3.20 percent. The broad-based S&P 500 lost 3.67 percent while the tech-heavy Nasdaq Composite tumbled 3.88 percent.
The euro bought $1.3543 and 105.25 yen, down from $1.3544