Global stock markets have seen their biggest losses so far this year, amid political uncertainty in Spain and Italy.
In the United States, stocks reversed after closing last week at a five-year high.
The mood was soured after figures showed that US factory orders were lower than expected in December.
There are also fresh concerns about stability in the eurozone, as Spain's prime minister Mariano Rajoy faces calls to resign over a corruption scandal. Mr Rajoy has denied the claims.
The Dow Jones Industrial Average fell 0.9 per cent to 13,880, the S&P 500 index closed 1.2 per cent lower at 1,496, and the technology focused Nasdaq Composite Index lost 1.5 per cent to 3,131.
In Europe, confidence was also shaken by the scandal in Spain, and there are concerns about the situation in Italy, as the former prime minister, Silvio Berlusconi, gains in popularity before elections this month.
A win by Mr Berlusconi could threaten the reforms introduced by the current government.
In London, the FTSE 100 fell 1.6 per cent to 6,247, the DAX in Germany dropped 2.5 per cent, and the CAC 40 in France shed 3 per cent.
Domestically, futures trade is pointing to losses at the start of the Australian session - the ASX SPI 200 index was down 35 points at 4,834.
On commodity markets, the spot gold price had risen to $US1,674.30 an ounce.
But West Texas crude oil dropped in line with stocks after a run of strong gains; it fell nearly 1.5 per cent to $US96.20 a barrel.
In currency trade, the Australian dollar was higher against the greenback and the yen; at 8:25am (AEDT) it was buying 104.3 US cents, 96.3 Japanese yen, 77.2 euro cents, 66.2 British pence and less than $NZ1.24.
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