Gloom from the euro zone cast a shadow over equity and oil markets as investors fretted about a new Europe-wide recession.
Weak economic data combined yesterday with political uncertainties hanging over the Netherlands and France to stoke fears about the ability of the region's governments to fight the European Union's fiscal crisis.
"It is a negative outlook, quite clear, you only need to look at the chart on the euro to see that," said Neil Mellor, a currency strategist at BNY Mellon in London.
"The German purchasing managers' index [PMI] figure was particularly poor and that's a concern because the country has been the driving force behind euro-zone growth."
In the Gulf, the Dubai Financial Market General Index led the declines, falling as much as 1.2 per cent during trading before closing 0.5 per cent lower at 1,640.55 points. Also closing down were Oman and Qatar's main indexes. Only two regional indexes, Abu Dhabi and Kuwait, ended in the black.
Markets took their cue from Europe, where the FTSE 100 index fell 2.1 per cent in late trading. Leading the slide downwards was the DAX in Germany, which was 3.4 per cent lower. France's CAC 40 was 2.8 per cent down. In the United States, the Dow Jones dipped 1.2 per cent in early trading.
The euro dropped 0.35 per cent to US$1.3150. US oil futures fell $2 to $101.88 a barrel.
"Regional markets were doing well before the data from Europe was released," said Marwan Shurrab, the chief trader Gulfmena Investments in Dubai. "Our markets are the most sensitive to changes in momentum and hence we closed in the negative territory."
The economic outlook for the euro zone was dented by weak purchasing managers' data for this month. Data for Germany, France and the overall euro zone suggested a quicker rate of contraction than had been anticipated.
"The composite data supports our view that the region will experience recessionary conditions during the course of this year," economists at Capital Economics wrote in a research note.
More negative news came from Spain, already one of the weak spots of the euro-zone's economy.
Official data released yesterday showed the country fell back into recession in the first quarter. GDP fell by an estimated 0.4 per cent in the first quarter after a 0.3 per cent dip in the final three months of last year, data from Spain's central bank showed.
"Employment fell again, sharply, with an estimated year-on-year decline of 4 per cent," the report said, noting a "significant" decline in labour costs.
Political issues also added to market worries. The Dutch government said it was preparing to resign because of a crisis over budget cuts, according to two broadcasters. The Netherlands has been united with Germany in urging stricter austerity measures.
Similar budget uncertainties emerged from France. Investors digested news of the victory in the first round of the country's presidential poll of the Socialist, François Hollande, who is pledging to seek changes to agreed European budget cuts.
Investors are also cautious ahead of elections in Greece on May 6, where the two main parties supporting the country's financial bailout plan are only slightly ahead, the latest polling data shows.
The fresh wave of gloom in the euro zone comes despite a weekend deal by the world's leading economies to provide an additional $430 billion (Dh1.57 trillion) to the IMF to help it fight the crisis.