At midday, Paris' benchmark CAC-40 index was down 0.5 percent to 4,150.24, Germany's DAX 30 index of blue chips was down 1.04 percent at 6,000.91 and the FTSE-100 share index was 1.3 percent lower at 5,135.90 in London.
Financial stocks across Europe took a pounding for the second day running as news of the collapse of Lehman Brothers and credit downgrades of American International Group Inc., the world's largest insurer stoked investor fears of wider financial and economic damage.
"My guess is that we haven't seen the bottom," said Tony Dolphin, director of economics and asset allocation at Henderson Global Investors in London. The markets "don't feel as panicky as yesterday," Dolphin said, but concerns remain about the crisis extending its reach from the financial sector to the wider economy.
In France, banks and insurers posted some of the steepest stock losses. Natixis lost 7.4 percent and Credit Agricole was down 4.4 percent, while BNP Paribas was 2.14 percent lower and insurer Axa dropped 1.55 percent.
The situation was similar in Germany, where Commerzbank fell 6.35 percent and Deutsche Postbank dropped 4.65 percent.
European central banks pumped billions more in short-term credit into the financial system for a second day to shore up confidence in the aftermath of Lehman Brothers Holdings Inc.'s bankruptcy in the United States.
The European Central Bank, which oversees monetary policy among the 15 countries that use the euro, launched its second one-day refinancing operation in as many days, offering up a 4.25 percent bid rate. On Monday, it added euro30 billion (US$42.5 billion) to money markets though banks had oversubscribed the offer by three times to euro90.3 billion (US$127.8 billion).
In London, the Bank of England provided another 20 billion pounds (euro25.2 billion; US$35.6 billion) in money to markets, four times the amount it pumped in on Monday.
David Buik, a market analyst with BGC Partners in London, told CBS News that the finance industry likely has some more house cleaning to do before investors decide the coast is clear.
"The economy in the U.S. or in Europe, or the U.K. simply cannot recover until such time that the banks are in a position to say they've emptied all the skeletons out of the cupboards... they've written down bad debts, they've shored up their balance sheets with fresh capital, and we're open for business as usual," said Buik. "Until that happens, you going to find a very nervous market."
Terms like 'panic' and 'turmoil' were being used by traders to describe the effects of the post Lehman Brothers shock wave as it smacked into overseas markets, reported CBS News correspondent Mark Phillips.
The collapse of the U.S. giant may have pushed all the global exchanges down, but bank stocks were punished particularly hard, said Phillips, who added that another phrase making the rounds Monday was that financial institutions were experiencing "a crisis of confidence that could be catastrophic."
The events of last few days, with Lehman Brothers' bankruptcy, Merrill Lynch & Co's sale to Bank of America Corp. and now AIG's downgrades will have two macroeconomic effects, Dolphin said. "It will extend the credit crunch, and maybe more importantly, it's another blow for business confidence," Dolphin said.
Asian stock markets plummeted Tuesday, playing catch-up with other markets around the world after a holiday Monday kept Tokyo and Hong Kong markets closed on the day Wall Street's landscape was dramatically changed.
"Today was a bloodbath," said Alex Tang, head of research at Core Pacific-Yamaichi, who noted that trading volume was its highest in months. "This was panic selling ... They are dumping shares, they just want to liquidate their positions."
To ensure liquidity, Japan's central bank on Tuesday injected of 2.5 trillion yen (US$24 billion) into money markets and issued a statement vowing to take measures to maintain stability in the country's financial markets.
Despite a flurry of last-minute negotiations over the weekend, storied New York investment bank Lehman Brothers was unable to find an investment partner to throw it a lifeline amid US$60 billion in soured real-estate holdings. Investors were further shaken by equally stunning news that Merrill Lynch, one of the world's most famous brokerages, sought to avoid a similar fate with a US$50 billion transaction to become part of Bank of America Corp.
The crisis appeared to be far from over. AIG, the world's largest insurer, was fighting for survival after downgrades from major credit rating firms, adding pressure as AIG seeks billions of dollars to strengthen its balance sheet.
On Wall Street Monday, the Dow Jones industrial average , or 4.4 percent, to 10,917.51 - its worst point drop since after the September 11, 2001, terror attacks.
U.S. stock futures were down modestly, suggesting Wall Street could fall further Tuesday.