Fears of a new Gulf War triggered a flight into safe-haven investments such as gold and government bonds and saw the dollar and stocks battered.
Oil prices slipped on talk of a deal to allow Saddam Hussein to move into exile, despite a speech from the Iraqi leader saying Iraq had mobilised its forces against the "crows of evil".
European stocks fell, weakened by the war fears and undermined by gloomy news from US tech giants Microsoft and IBM.
Both events put war back on top of the market agenda after something of a respite in recent weeks.
The threat of war also battered the dollar, sending it to a three-year low versus the euro that stretched to $1.0668, and a four-year low against the safe haven Swiss franc at 1.368.
The FTSE Eurotop 300 index of pan-European blue chips was down 1.37 per cent; the euro zone DJ Euro Stoxx 50 index was 2.05 per cent lower. "Everyone is negative on Iraq and in combination with the gloom surrounding technology, the market is vulnerable," said Mr Gert de Mesure, head of equity strategy at Delta Lloyd Securities in Antwerp.
Wall Street looked set to open lower, with US stock index futures indicating moderate falls in the blue-chip Dow Jones industrial average index and the broader Standard & Poor's 500, and a 1.2 per cent opening loss for the tech-heavy Nasdaq 100.