In Europe, Italy's benchmark stock index plunged 2.7 percent.
Italy's two-year government bond yield, which has been the focus of a recent selloff, was down as much as 50 basis points at 1.45%, while the euro climbed to $1.1690 after making its biggest jump since early January on Wednesday.
USA markets were closed Monday for the Memorial Day holiday.
In a move that raised the possibility of a snap election in Italy, President Sergio Mattarella rejected the coalition's nomination of Paolo Savona as finance minister. The prospect that populist parties there could push to leave the currency is the big concern for financial markets. Market watchers expect him to lose the vote and new elections to be called shortly after.
Banks including Banco BPM SpA, Unione di Banche Italiane SpA, Intesa Sanpaolo and UniCredit, have been the worst performers among Italian stocks since May 15.
But US Treasury yields have tumbled as traders flock to assets considered safe - yields go down the more the bonds are in demand - while the yen, a go-to unit in times of turmoil, rallied.
Speculation the European Central Bank could intervene in an attempt to calm markets has mounted as political parties in Italy failed to form a government and the potential for a euro exit emerged in recent days.
Gold increased 0.3 percent to $1,302.64 an ounce.
The UK's FTSE ended down 127%, Germany's Dax down 1.5%, and France's CAC down 1.3%.
"Part of the issue in today's market stems from the fact that Moody's threatened to downgrade the sovereign credit rating of Italy on Friday", said Wayne Wicker, chief investment officer at ICMA Retirement.
In Spain, a political vacuum looks set to be averted as Pedro Sanchez was nearly certain to become Spain's new Prime Minister after his socialist party secured enough votes to topple Mariano Rajoy in a confidence vote scheduled on Friday over a corruption case.
Dialog's shares have slumped almost 40 percent so far in 2018, following a loss of 35 percent in 2017.
US government bond prices jumped as investors moved money into lower-risk assets.
A trader at a European bank said the decline was also triggered by tecnhnical factors and a 4.5 percent slump in Fiat Chrysler shares. Oil prices have come under pressure following news last week that Saudi Arabia and Russian Federation had discussed raising output.
Oil prices meanwhile struggled as expectations grew that Saudi Arabia and Russian Federation would pump more oil to counter potential supply shortfalls from Venezuela and Iran, even as US output has surged in recent years. Heating oil shed 1.1 percent to $2.19 a gallon. On the mainland, the Shanghai composite lost 2.53 percent to close at 3,041.65.
The Dow Jones industrials lost 432 points, or 1.8 percent, to 24,323. The United States seems on the brink of announcing tariffs on European steel and aluminium, which clouds the exports outlook and could have an additional inflationary impact if the trade conflict gets out of hand.
The shock waves also reached Asian markets as Japan's Nikkei 225 dropped 122.66 points or 0.55%, closing at 22,358.43 on May 29.