A deepening crisis in Greece hit global markets on Monday, as the country imposed capital controls ahead of a national referendum on creditors' bailout conditions this weekend.
Uncertainty surrounding the country's economic future dragged equity markets lower. The pan-European Stoxx 600 tumbled 2.6 percent. Both Germany's DAX and France's CAC closed more than 3 percent lower having unwound some of their losses.
Wall Street joined the sell-off, with the blue-chip Dow Jones Industrial Average falling 200 points in early U.S. trade. The Nasdaq and were both down more than 1 percent each.
"Although some of the initial reaction in the markets to the decision by the Greek authorities to hold a referendum has been unwound, there is plenty of scope for renewed volatility in the event of a near-term Grexit, the risk of which we think probably now exceeds 50 percent," John Higgins, chief markets economist at Capital Economics, said in a note.
Greece's main stock exchange is expected to remain closed all week - along with the country's banks - although there were some reports late on Monday that Greek banks could open on Thursday.
Still, the worsening crisis in Greece hit banking stocks elsewhere in Europe hard on Monday. Portugal's Banco Comercial Portugues slid more than 9 percent, while Italy's Banca Monte Dei Paschi Di Siena (BMPS) lost more 7 percent of its value.
Growing fears of a Greek default were reflected in the sovereign debt markets, with yields on Greek government debt spiking. The 10-year yield hit 14.5 percent, up 367 basis points - its highest level since December 2012.
Peripheral bond yields also rose, with Portugal, Italy and Spain's 10-year yields all up on the day.
The yield on Germany's benchmark 10-year Bund, meanwhile, fell 18 basis points to around 0.74 percent. U.S. Treasury yields also slipped amid a flight to safe-haven assets.
The euro proved resilient to the day's market turmoil -- the single currency was last down just 0.16 percent at $1.1146, having recovered most of its early losses.
"I think the euro is strengthening because people have come to believe that either way, the euro will be okay," Art Cashin, director of floor operations at UBS, said on CNBC.
Deutsche Bank's Francis Yared warned of a "pronounced" risk-off move in markets.
"The events in Greece are a stark reminder that the current euro zone architecture is vulnerable to domestic politics," he wrote in a note on Monday. "This in itself will justify some structural risk premium unless there is an institutional change or further economic convergence."
Read MoreGreece: Uncertainty reigns after referendum gamble
Asian stocks also closed lower, despite news that the People's Bank of China (PBOC) cut reserve requirements and interest rates Saturday. Japan's benchmark Nikkei 225 ended the day down 2.8 percent, with China's Shanghai Composite fell 3.2 percent.
Greece's Prime Minister Alexis Tsipras announced over the weekend that the country's banks would be temporarily closed. Reuters reported that lenders would remain shuttered until July 6.
It comes ahead of a referendum on Sunday, July 5, which will see citizens vote on bailout terms set out by the European Commission, International Monetary Fund (IMF) and European Central Bank.
The failure to reach agreement on cash-for-reforms deal pushes Greece towards defaulting on a 1.5 billion euro ($1.7 billion) debt repayment due to the IMF on Tuesday.