Stocks and the euro fell sharply after Germany warned that a comprehensive European plan to fight the continent's debt problems will not mark a decisive end to the crisis.
German finance chief Wolfgang Schaeuble dampened expectations of the upcoming summit, saying that leaders would likely adopt a five-point plan to address instability within the eurozone but that more work would still need to be done.
"We will not ... have the definitive solution on the weekend," the finance minister said in Duesseldorf, according to the news agency dapd. "But we want to get rid of the market uncertainty with the five elements."
That's in contrast to some of the comments that emerged last weekend, after a meeting of the G-20 finance ministers in Paris.
Optimism over the debt plan had helped stocks start the week positively, extending last week's rally, which sent some of the world's indexes back into positive territory for the year.
"German officials clearly decided that a degree of expectation management was needed, and a statement was made warning that if anyone expected a package to be in place by next Monday then they were setting themselves up for disappointment," said David Jones, chief market strategist at IG Index.
Jones said there is nothing to suggest that markets are heading back to the "stomach-lurching dives" experienced in the last couple of months, but it could well make for "some subdued moves in the days ahead" until the result of next weekend's meeting.
In Europe, the FTSE 100 index of leading British shares closed down 0.5 percent at 5,436.70 while Germany's DAX fell 1.8 percent to 5,859.43. The CAC-40 in France ended 1.6 percent lower at 3,166.06.
In the U.S., the Dow Jones industrial average was 1.2 percent lower at 11,500 while the broader Standard & Poor's 500 index fell 1.1 percent to 1,212.
When risk appetite reverses, as occurred today, the dollar usually advances against the euro thanks to its status as a safe haven currency. By late afternoon, the euro was down 1 percent on the day at $1.3764.
Oil, on the other hand, often falls as investors rein in their expectations of the economic outlook. Benchmark oil for November delivery was down 53 cents at $86.27 a barrel in electronic trading on the New York Mercantile Exchange
Europe's debt crisis will likely remain the main driver in markets for the week. Investors are eager to understand how quickly the eurozone is thrashing out its plan to stabilize the debt crisis. The European turmoil threatens to send the global economy back into recession and raises questions about the future of the euro currency.
Over the past couple of weeks, stocks around the world have recovered much of the ground lost so far this year, on hopes that Europe was finally getting to grips with the debt crisis, which has already seen three countries require multibillion financial bailouts.
The growing view in the markets was that Germany and France, the eurozone's two biggest economies were preparing a three-pronged solution to the crisis, which would involve getting Greece's private bondholders, such as banks, to take a bigger loss on their holdings of Greek debt. In addition, they are thought to be discussing how to ramp up the size of its bailout fund, possibly to €2 trillion, and how to shore up the financial position of the banking sector.
Though sentiment remains supported for now, investors are aware of the European leaders' failure in the past to come up with a comprehensive plan. Previous attempts have repeatedly turned out to be insufficient to ease the market turmoil and the debt burden of Greece.
"A hefty dose of scepticism is a prerequisite perspective," said Marc Ostwald, market strategist at Monument Securities.
Markets have also risen on mounting evidence that the U.S. economy may be getting over its summer soft patch, easing fears that the world's largest economy may be heading back into recession.
Investors will be keeping a close watch on US economic data. The news was mixed, with a measure of US industrial production up for a third month, but a gauge of New York area manufacturing falling by more than anticipated.
Earlier in Asia, stocks advanced mainly on the European debt hopes.
Japan's Nikkei 225 stock average finished up 1.5 percent at 8,879.60, hitting a six-week intraday high at one point. Hong Kong's Hang Seng jumped 2 percent to 18,873.99 while South Korea's Kospi rose 1.6 percent to 1,865.18 and Australia's S&P/ASX 200 climbed 1.7 percent to 4,275.40.