European stock markets closed sharply lower after a day of continued fears about eurozone debt problems and their potential impact on the global economic recovery.

The FTSE 100 index in London closed down by 2.54% to an eight-month low of 4,940.68 points.

Germany's Dax index was 2.34% lower, while in France the Cac 40 fell 2.9%.

In afternoon US trade, the Dow Jones was down by 1.55%, and the broader S&P 500 index was 1.51%.

Earlier, Asian markets also saw sharp falls. As well as eurozone worries, stocks in South Korea and Japan had been affected as North Korea reportedly went on to military alert.

North Korea later announced it was severing ties with South Korea.

In London, the FTSE 100 has now fallen by more than 10% in little more than a month after hitting a 22-month high in April - it stands at its lowest level since 7 September 2009.

'Toxic cocktail'

It's all looking a bit unstable again Robert Peston, BBC business editor Peston on market turmoil

The renewed concerns about eurozone debt follow Monday's strongly-worded comments from the International Monetary Fund that the Spanish economy needs comprehensive and far-reaching reform.

That added to investors' worries over the weekend rescue of Spanish bank Cajasur by the Bank of Spain, only the second time the central bank has saved a regional lender.

Amid concerns over solvency in the sector, and in the wake of the Cajasur rescue, four Spanish savings banks then announced plans to merge.

Will these [government budget] cuts reduce demand and so make cutting deficits even harder? There is a risk here. Gavin Hewitt, BBC Europe editor Read Gavin's blog in full

Cajastur, Caja de Ahorros del Mediterraneo, Caja Extremadura and Caja Cantabria said they had reached agreement to form a group that would "strengthen solvency and assets of the participating banks".

"There's never been any mystery about the excessive exposure of Spain's banks to a bloated property market," said BBC business editor Robert Peston.

"The mystery has been how its banks avoided crippling losses on this exposure - although that increasingly looks like pain postponed rather than avoided.

"Or, at least, that's what today's retreat in share prices across Europe is saying, with bank shares falling especially sharply," he added.

These concerns have lead investors to seek "safe havens" for their money. German government bonds - or Bunds - are currently seen as one such place - the ten-year bund yield sank to a record low of 2.55%.

The yield is the interest rate an investor receives on a bond. If it is low in comaprison to other governments' bonds, it indicates investors have high trust that it will be paid back and are prepared to accept the lower interest in return for that certainty.

Weak euro

A strong dollar is another traditional safe haven.

The euro and the pound both weakened against the US currency.

The euro fell by 0.8% to $1.228. Against the pound the euro was trading at £0.855, making £1 worth 1.169 euros.

The continued weakness of the euro is a concern, with investors dumping the currency amid fears that debts will cause defaults by weaker countries in the European Union.

The single currency has fallen in value by almost a fifth against the dollar in the last six months.

Richard Hunter, head of equities at Hargreaves Lansdown stockbrokers, said: "The toxic cocktail worsens. Continuing fears over the European debt situation stalling the global economic recovery has been exacerbated by the potential of military tensions in Korea."

And he said there was a shortage of buyers prepared to commit to the market at the present time.

'Sluggish recovery'

On Tuesday, the European Union Economy Commissioner, Olli Rehn, warned that governments needed to make major reforms to boost growth.

"The big risk is that once the recovery gets more robust, we sit idly in self-complacency and forget the structural reforms.

"That would lead us to a sluggish recovery - or even a lost decade," he said in a speech at the Brussels Economic Forum.

He said the reforms needed for each European country varied, but he called for the opening up of national markets.

Countries such as Greece, at the centre of fears about the eurozone economy, have regularly ignored EU calls to liberalise markets.

Another nation which has ignored calls to open its markets is Italy, which is set to reveal an austerity budget later on Tuesday.

Regional tensions

Earlier in Asia, Japanese stocks fell by 3.1%, and shares in South Korea fell by 2.7%.

Australian shares fell by 3%, Taiwanese stocks dropped 3.23% and the wider MSCI measure of Asia-Pacific shares outside of Japan fell by 3.6%.

Shares in Hong Kong, Singapore, Indonesia, China, India, Thailand and Malaysia all fell.

There were reports in South Korea that North Korea had told its military to prepare for war, but only if the South attacked it first.

Tensions in the region have been growing since international investigators blamed the North for torpedoing and sinking a South Korean warship in March, killing 46 sailors.

The falls in Asia come after major markets in the US closed lower overnight, with the Dow Jones shedding 1.2% and the S&P 500 dropping 1.3%.