Crude oil at new record highs and worrying inflation data on both sides of the Atlantic forced European shares into their largest one-day slide in two months on Tuesday.
Mining stocks, which pared some of their recent gains, and banks were the largest drags on the European equity market, which came under pressure after data showed troubling increases in wholesale inflation in the United States and Germany.
In Europe's largest economy data also showed investor expectations for the economy deteriorated by more than expected.
Crude oil hitting a new high above $129 a barrel fed by bullish investment bank forecasts added to the concern among investors that persistent price pressures will curb the ability of central banks to loosen monetary policy to protect economic growth.
The FTSEurofirst 300 index of top European shares ended 2 percent down at 1,350.54, making this its worst one-day fall since March 17, when the index hit a 2-1/2 year low.
"The next move for the market is going to be down and we're going to have a look at the mid-March lows probably," said Andrew Lynch, a portfolio manager at Schroders.
"Knock on wood we don't go through (those lows), simply because there was so much fear and panic around two months ago ... we're not in as bad a situation, but we are by no means out of the woods," Lynch said.
"The central banks have put in the facilities to ensure banks aren't going to go bust for liquidity reasons. But they can't really cut interest rates because inflation is still too high for that, and so I fear that the cycle of capitalism is going to have to take its course and we're going to have to start using swear words like 'recession'."
The FTSEurofirst is still up about 13 percent from the lows of mid-March, but has shed 10 percent so far this year.
Mining stocks fell led by BHP Billiton and Rio Tinto, which fell 6.9 and 7.9 percent, respectively.
But these declines come just days after shares in both companies hit record highs.
Antofagasta and Xstrata fell 4.5 to 6 percent, while Kazakhmys fell by more than 7 percent.
The DJ Stoxx European Basic Resources index fell 5.2 percent after rising 7 percent in the past four days. This index has risen 14 percent this year, making it the top performer among the 18 sectoral indices. By comparison the DJ Stoxx telecoms index is down 20 percent in this time.
"It's a switch out of the sector to pay for banks' rights issues," said a trader.
Several banks have unveiled large rights issues to help shore up balance sheets ruptured by losses linked to credit market investments.
Oil stocks were among the largest drags on the market.
BP and Royal Dutch Shell were down 1.4 to 2.3 percent, while France's Total lost 0.3 percent.
Banks were the biggest laggards in the wider market.
HSBC lost 2.3 percent, Banco Santander fell 1.4 percent, BNP Paribas fell 1.8 percent and Credit Suisse lost 2.5 percent.
After stellar German economic growth numbers last week, investors were brought down to earth by the ZEW index of investor sentiment, which worsened in May for the second straight month.
"German investors have become more pessimistic as the strong euro and high oil and food prices are about to take their toll on the German economy," ING economist Carsten Brzeski said in a note.
"More than before the future path of the German economy will depend on private consumption and this is still sluggish. Welcome back to reality."
Among the very few gainers on the FTSEurofirst 300 were British Land, which rose 1.1 percent after Britain's second largest property company said the pace of decline in the value of its assets was slowing, following better-than-expected full-year figures.
Utilities EDF and Gaz de France both rose between 0.6 percent and 1.1 percent.