Stocks slumped on Friday despite a drop in bond yields, as rattled investors did not step in to pick up bargains.
The dollar rose against its main rivals ahead of Congress later Friday voting on US President Joe Biden's enormous $1.9-trillion economic rescue package.
Oil prices fell after striking 13-month peaks Thursday on keen demand.
Vaccine rollouts, slowing Covid infection rates and Biden's stimulus package have repeatedly sent stocks up in recent weeks. But now they are proving to be a double-edged sword for traders as they weigh the much-needed return to pre-pandemic life with the prospect that prices could rise, possibly sharply.
There is a worry that surging inflation could threaten one of the key pillars of the rally on world markets from their March nadir -- record-low borrowing costs.
Alarm bells have been ringing for weeks as the yield on benchmark 10-year US Treasuries climbed to one-year highs earlier this week as investors moved out of the safe haven of government bonds.
Yields have advanced around the world, from New Zealand and Australia to France, Germany and Japan.
Soaring US bond yields sparked a hefty sell-off on Wall Street on Thursday -- led by the tech-heavy Nasdaq's 3.5 percent plunge.
Asia followed suit on Friday, suffering one of its worst sessions since the dark days of last March's collapse. Losses then rolled over into Europe and onto Wall Street despite bond yields falling back and a muted US inflation reading for January.
Only the Nasdaq bucked the trend, showing a 0.8 percent gain in late morning trading.
Market analyst Chris Beauchamp at trading platform IG said "it is clear that very few investors are willing to step up and buy the dip, at least for the time being."
He noted that shares in mining, oil and financial companies which have climbed in recent weeks have borne the brunt of the selling
"This is the most serious move to the downside in months" except for a swoon in the market in mid-January, Beauchamp said.
- Uncertainty -
CMC Markets UK analyst Michael Hewson said that "while bond yields have retreated from their highs for the week, there is still a fair degree of uncertainty about their overall future direction, in light of the rapid speed of the moves seen in the past week or so."
The global sell-off came despite reassurances from Federal Reserve chief Jerome Powell that US interest rates will not rise for the foreseeable future.
"Investors are clearly spooked despite the best efforts of Jerome Powell," Craig Erlam, market analyst at Oanda trading group, told AFP.
"Policymakers may be comfortable with yields rising as it reflects the view that the economy is heading for a powerful recovery, but investors are less enthusiastic," he added.
On the corporate front and at the end of another busy earnings week, shares in European airlines giant IAG rallied 3 percent despite the owner of British Airways and Iberia diving into a record 6.9-billion-euro loss on Covid fallout.
Analysts said the worst could be over for the battered aviation sector.
- Key figures around 1630 GMT -
New York - Dow: DOWN 1.1 percent at 31,065.76 points
EURO STOXX 50: DOWN 1.3 percent at 3,636.44
London - FTSE 100: DOWN 2.5 percent at 6,483.43 (close)
Frankfurt - DAX 30: DOWN 0.7 percent at 13,786.29 (close)
Paris - CAC 40: DOWN 1.4 percent at 5,703.22 (close)
Tokyo - Nikkei 225: DOWN 4.0 percent at 28,966.01 (close)
Hong Kong - Hang Seng: DOWN 3.6 percent at 28.980.21 (close)
Shanghai - Composite: DOWN 2.1 percent at 3,509.08 (close)
Euro/dollar: DOWN at $1.2095 from $1.2166 at 2200 GMT
Pound/dollar: DOWN at $1.3924 from $1.4141
Euro/pound: UP at 86.83 pence from 86.04 pence
Dollar/yen: UP at 106.65 yen from 105.87 yen
Brent North Sea crude: DOWN 1.1 percent at $66.16 per barrel
West Texas Intermediate: DOWN 1.8 percent at $62.40 per barrel