French shares extended losses after an explosion at a French nuclear site.
Adding to the gloom was the failure of the weekend's meeting of finance ministers from the Group of Seven industrialised nations to come up with fresh proposals for boosting global growth.
"There was hope there would be something more resolute out of the G7 meeting over the weekend," said Ian King, head of international equities at Legal & General, which has 356 billion pounds ($566 billion) under management.
"And there are German politicians saying they need to organise an orderly Greek default. Clearly, the rhetoric is stepping up in Germany. They're getting fed up with the periphery.
"My view is that if there is to be a default or restructuring in Greece, you would get a crystallisation. But there's a lack of certainty, which is the enemy of markets."
Stocks fell across the board, with banks the standout losers. The STOXX Europe 600 banking sector index fell 4 percent and hit a 29-month low.
French bank shares tumbled on concern about their exposure to Greek and Italian sovereign debt, as well as a possible downgrade by Moody's credit rating service, and talk of partial nationalisation.
Heavyweight BNP Paribas fell 13.4 percent, with volume at more than 105 percent of the 30-day average.
Societe Generale slumped 8.9 percent. SocGen shares have fallen more than 60 percent in 2011, pushing its market value below 13 billion euros ($17.8 billion). It will be ejected from the STOXX Europe 50 Index at the end of this week.
At 1158 GMT, the pan-European FTSEurofirst 300 index of top shares was down 3.3 percent at 885.56 points, and had gone as low as 883.04, its lowest since July 2009.
The index has lost more than 20 percent in 2011. Investors have cut their exposure to risky assets such as stocks following an escalation of the euro zone debt crisis, and weak economic data from major economies, sparking recession worries.
The index fell 2.6 percent on Friday after the European Central Bank's German board member Juergen Stark quit amid disagreements over its policy of helping out troubled euro zone nations by buying up their sovereign bonds, highlighting divisions within the ECB on the handling of Europe's debt woes.
An explosion at the nuclear site of Marcoule injured four people, France's ASN nuclear safety watchdog said, but police said there was no risk of contamination.
Insurers, exposed to the equities market, were another major casualty. The STOXX Europe 600 Insurance Index fell 4.6 percent, and French heavyweight Axa tumbled 10.3 percent.
But Britain's banks outperformed, with investors feeling the effect of new regulations was already in the price, after recent steep falls.
The banks face some of the world's toughest regulation under reforms outlined on Monday which require them to insulate their retail lending activities and store billions in extra capital at a cost of up to 7 billion pounds.
However, Barclays fell 0.5 percent.
Back in the wider market, technical analysts were bearish on the outlook.
On the DAX, he said: "There is precious little in the chart to suggest that a bottom is in place ... If it breaks lower from here the next area of possible support is all the way down at 4,570 or so."
Strategists said the wider macroeconomic and political picture would continue to preoccupy investors, despite some equities looking very cheap after the sell-off.
"Valuations don't work when you've got such extreme uncertainties," King said.
"We would expect policymakers to stimulate the economy, but they are finding it difficult to reach common," said Veronika Pechlaner, a fund manager on the Ashburton European equity fund.
"The longer they wait, the more difficult it will be, and that is what the market is looking at."
Greece must decide for itself whether to leave the euro zone, but Athens cannot expect further aid unless it enacts reforms, a senior member of German Chancellor Angela Merkel's Conservatives said on Monday.
The cost of insuring peripheral euro zone debt against default rose to record levels for Greece and Portugal.