The FTSE 100 index of leading British shares closed down 258.32 points, or 5.7 percent, at 4,272.41, while Germany's DAX was 353.30, or 6.8 percent, lower at 4,813.57. France's CAC-40 was down 230.86 points, or 6.4 percent, at 3,387.25.
Fueling the gloom were new statistics pointing to a serious recession, said Palmer. Global trade volumes fell by half since June, both in Europe and America, and most companies have been reporting sinking profits for weeks.
Palmer said that small businesses in particular, often viewed as the cornerstone of an economy, are saying they can't get the loans they need from weak and jittery banks.
The Dow Jones index of leading U.S. shares was down 301.39 points, or 3.3 percent, at 8,837.88. Thursday's losses on the Dow come a day after a nearly 500 point decline Wednesday.
Any hopes that lower borrowing costs around Europe would fuel a rally in stocks soon dissipated and investors continued to book profits following recent sharp gains amid mounting fears about the state of the world economy. Rate cuts often boost stocks in the short term and can support growth, but on Thursday investors were not impressed, especially with the ECB decision.
While the Bank of England slashed its benchmark rate by 1.5 percentage points to 3.0 percent, a level not seen since 1955 and its biggest single cut since March 1981, the European Central Bank and the Swiss National Bank - in an unscheduled decision - opted for more modest half-point reductions. Central banks also cut rates in Denmark and the Czech Republic.
The Bank of England's bigger than anticipated rate cut stoked expectations that the European Central Bank would be more aggressive than expected. Its decision to cut by only a half-percent disappointed investors looking for more boldness.
"The prospects for the euro-zone avoiding recession now look virtually non-existent, and the ECB will be challenged to change its relatively conservative approach quickly to boost prospects across the continent, before a bad situation gets decidedly worse," said Ben Read, managing economist at the Center for Economic and Business Research.
The failure of the FTSE to rally strongly in the wake of the Bank of England's aggressive interest rate cut indicated that the bank may have further reinforced fears about the length and depth of the recession in Britain.
"What does the Bank know that the rest of us don't?" said Andrew Milligan, head of global strategy at Standard Life Investments.
"The Bank of England's inflation report due out next week should provide the answer, giving investors full and detailed information about its views on the depth and extent of the British recession and how far inflation might fall in 2009," he added.
Europe's indexes had already been lower in the wake of hefty losses Wednesday on Wall Street and in Asia overnight as investors fretted about the global economy. Japan's Nikkei index was down 6.5 percent at 8,899.14, and Hong Kong's Hang Seng Index 7.1 percent lower at 13,790.04.
Stocks around the world have enjoyed a strong rally over the last week or so, partly on relief that the U.S. presidential election was coming to an end.
However, investors know that President-elect Barack Obama will have his work cut out to improve the U.S.'s immediate economic prospects and that Inauguration Day is still more than two months away.
Further proof of the scale of the downturn in the U.S. emerged Thursday with jobless claims data fanning investors' worries that the economy is in recession.
New claims for unemployment benefits did dip by 4,000 to a seasonally adjusted level of 481,000, according to the Labor Department. But jobless claims above 400,000 are considered recessionary levels, and have run above that figure for 16 weeks.
The run of bad claims data has ratcheted up fears that Friday's closely-watched U.S. jobs report for October will end up being much worse than anticipated.
Earlier, South Korea's benchmark Kospi index broke a five-session winning streak to dive 7.6 percent. Markets in Singapore, Australia and mainland China also dropped sharply.
Concerns about the global economic outlook hit oil prices too. They were down $4.35 a barrel to $60.95 a barrel. Oil prices have fallen by around 60 percent since peaking at $147.27 a barrel in mid-July.
Disappointment about the European Central Bank's interest rate cut hit the euro, which was down 0.8 percent at $1.2855. Elsewhere, the dollar was up 0.1 percent at 98.30 yen.