Nervous investors channelled cash into less risky assets as doubts resurfaced over Italy and Greece's willingness to implement tough budget and debt measures demanded by other eurozone members, while Germany hardened its stand against giving them more aid.
"Europe is where you have to be focused right now, and Europe doesn't look good," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
Wall Street stocks were down nearly 2 percent after a three-day holiday weekend, with Friday's US jobs report, which showed zero net jobs growth, also hurting investor confidence.
The Swiss central bank set a limit of 1.20 francs to the euro in an attempt to keep its currency strength from damaging the economy. Global investors have poured money into the Swiss franc seeking a relatively safe asset.
The move took some of the safe-haven shine off gold, but the precious metal was not far from its record high above $1,900 an ounce.
US and German government debt, perceived as safer assets amid the turmoil, rallied and pushed benchmark yields to historic lows.
The pan-European FTSEurofirst 300 was down 0.7 percent after falling more than 4 percent on Monday on renewed worries about Europe's ability to solve its debt problems.
US and European equities briefly pared their losses after a report showed that growth in the US services sector unexpectedly improved in August.
This snapshot soothed some worries that the world's biggest economy is on the brink of recession, but not enough to scale back expectations the Federal Reserve would engage in another round of monetary stimulus to boost sluggish US growth.
"When something like Europe is dominating, we would have to have a giant surprise to change the tone. Bears are running the Street right now," said Todd Schoenberger, managing director with LandColt Trading at Lewes, Delaware.
World stocks as measured by MSCI fell 1.6 percent, while Japan's Nikkei closed off 2.2 percent.
After the Swiss National Bank announcement, the euro was trading at just above the central bank's new target of 1.20 Swiss francs after being at around 1.10 francs. It fell to a record low 1.0075 on Aug. 9.
The euro touched an eight-week low against the dollar, last trading at $1.4001.
Ten-year German and US government debt yields stayed near historic lows, well below 2 percent, signalling that the intensive search for safety was continuing.
The Swiss central bank's move rocked a number of other assets, notably gold. It lost some allure to trade at $1,903 an ounce after touching a record high at $1,920.
In the oil market, US crude futures for October delivery were down $2.08 at $84.35 a barrel after touching a session low of $83.20.
Copyright Reuters, 2011