Fears over the impact of political unrest in Egypt has sent oil prices to their highest level in more than a year.
Benchmark crude for August delivery rose to around $102 a barrel on the New York Mercantile Exchange - the highest level since May last year - after a rise of more than $2 a barrel overnight.
Stock market investors were also spooked by disappointing data from the Chinese non-manufacturing sector and growing concerns over the future of Portugal's coalition government as it attempts to pursue the austerity measures demanded by creditors.
The FTSE 100 Index was down 1.6 per cent or 100 points, having recovered in recent days from the sell-off triggered by credit crunch fears in China and the prospect of a tapering of economic stimulus measures in the United States.
The DAX in Germany fell 1.7 per cent to 7774.43 and the CAC-40 in Paris was down 1.6 per cent to 3,683.70. US stock markets will close at 1pm today ahead of the Independence Day holiday.
Japan's Nikkei 225 edged down 0.3 per cent to 14,055.56 and Hong Kong's Hang Seng shed 2.5 per cent to 20,147.31.
Seoul's Kospi was down 1.6 per cent to 1824.66. In China, the Shanghai Composite lost 0.6 per cent to 1,994.27. Australia's S&P/ASX 200 fell by 1.9 per cent to 4,744.10.
Michael Hewson, senior market analyst at CMC Markets, said: "When talk of military intervention in Egypt is added to the mix, as well as the spectre of a resumption of political uncertainty in Europe. then you have the perfect recipe for Europe's markets to open lower."
Mohamed Morsi, who was inaugurated as Egypt's first freely-elected president a year ago, rejected an ultimatum by the army last night that the country's leadership crisis must be resolved by today, pledging to protect his "constitutional legitimacy" with his life.
His vow not to resign came hours before a deadline to yield to the demands of millions of protesters or see the military install a new leadership.
Egypt is not an oil producer but its control of the Suez canal, one of the world's busiest shipping lanes, gives it a crucial role in global energy supplies.
Additional reporting Associated Press