The FTSE 100 index of leading British shares closed down 218.20 points, or 5.4 percent, at 3,861.39, while Germany's DAX was 238.82 points, or 4.9 percent, lower at 4,622.81. The CAC-40 in France was 200.07 points lower, or 5.9 percent, at 3,181.00.
Having rebounded some 150 points after the open, the Dow Jones index of leading U.S. shares was down 239.18 points, or 2.8 percent, at 8,338.73. Japan's Nikkei earlier had its worst day since 1987.
After a bright opening, selling resumed on Wall Street after the Federal Reserve Bank of Philadelphia reported that manufacturing conditions in its region deteriorated significantly in October. Its current activity index of current manufacturing activity collapsed from 3.8 in September to an 18-year low of -37.5.
"Yet another day of follow my leader as Asian, European and London markets bit the dust on the back of a record fall in the Dow Wednesday," said Howard Wheeldon, senior strategist at BGC Partners.
"Market sentiment is now being completely driven by fear," he added.
Europe's stock markets had already been in retreat before Wall Street's open following the Dow's record percentage fall Wednesday and the Nikkei's 11 percent tumble overnight.
The renewed selling over the last day or two means that the world's stock markets are heading back towards the levels they were at the start of the week, before they breathed a sigh of relief on the unveiling of a series of bank rescue packages from governments around the world to restore confidence.
David Jones, chief markets strategist at IG Index, said Thursday's declines have to be kept in the context of where the markets were last Friday but warned that a rout could occur if the Dow slips below last week's low of around 7,900 points.
"After that we have to get ready for the trap door," he said. Governments continue to weigh in with proposals to limit the crisis in financial markets.
The Swiss government Thursday became the latest to announce its plans to support its banking system with billions of dollars. The main recipient will be UBS AG, which is being offered up to $54 billion so that it can part with securities that have gone bad since the start of the worldwide financial crisis. Credit Suisse said it had also been offered government assistance but would not make use of it at this time, choosing instead to raise about 10 billion Swiss francs ($8.75 billion) on the open market.
On Tuesday, the U.S. government followed Europe's lead and announced it is to pump some $250 billion into shares of its leading banks as part of the $700 billion package passed by Congress earlier this month.
The U.S. plan was criticized overnight for being insufficient by Japanese Prime Minister Taro Aso. He blamed the renewed drop in markets on an "insufficient" U.S. bailout plan totaling $700 billion. "Since it was insufficient, the market is again falling sharply," Aso told lawmakers.
The long-term key is whether the flurry of activity by governments can actually break the logjam in credit markets. Despite the coordinated interest rate reductions announced last week, and massive liquidity boosts, the rates at which banks lend remain abnormally high, despite some easing in rates and spreads this week.
The interbank lending rate for three-month dollar loans fell for the fourth day running. It dropped 0.05 percent to 4.50 percent, while the three-month Euro Interbank Offered Rate, or Euribor, fell almost 0.08 percentage points to 5.09 percent.
Though the rates are falling, the differential between the rate at which banks lend to each other and official central bank lending rates remain high, signalling a strong degree of mistrust still exists. In the U.S. the base central bank rate is 1.5 percent, while in the euro area it stands at 3.75 percent.
Though the rescue packages have helped alleviate the pressures on the banking system, they will do nothing to prevent a serious economic slowdown. Fed Chairman Ben Bernanke warned in a speech Wednesday that patching up the credit markets won't provide an instantaneous jolt to the economy.
Concerns about the global economic outlook are clear also in the price of oil, which has fallen another $4.39 to $70.15, a new 14-month low.
Russian shares suffered another mauling Thursday due to growing concerns about plunging oil prices as well the banking sector. The MICEX index shed 9.1 percent to close down at 626.9 points, while the RTS index plummeted by 9.5 percent to 713.9 points. Both indexes shut down trading for an hour during the day to stem deep falls.
Commodity stocks are also in retreat after Rio Tinto PLC, one of the world's biggest mining giants, warned of slowing raw material demand from China, the world's biggest growth engine over the last few years. "The Chinese economy is pausing for breath after spectacular GDP growth," the company's chief executive Tom Albanese said.
Earlier, Tokyo's Nikkei 225 stock average slid 1,089.02 points, or 11.41 percent, to 8,458.45, its biggest drop since the 1987 stock market crash.
In South Korea, the main index dropped 9.25 percent after Standard & Poor's said it may downgrade the credit ratings of some of the country's leading banks. The ratings agency warned the credit crisis could make it difficult for the companies to refinance maturing debt.
And Hong Kong's key index trimmed losses, closing down 4.8 percent after falling more than 8 percent earlier. Australia's main share index fell 6.7 percent while India's was down 4 percent.
Meanwhile, Brazilian stocks opened slightly lower a day after their worst trading session in a decade. Sao Paulo's Ibovespa stock index was down 1.3 percent at 36,338 in early trading Thursday after losing 11.4 percent the day before.
The U.S. dollar was steady at 100.43, while the euro was down at $1.3412.