Borrowing costs have risen sharply for countries which received bailouts at the height of the eurozone crisis following the rescue deal for Cyprus.
The FTSE 100 followed other European stock markets lower when trading began in London, falling 1.6% in the first few minutes as investors digested the implications of the controversial agreement.
Asia was first to give its reaction with the Nikkei in Japan closing 2.7% lower while the Hang Seng lost 2%.
Those falls were more closely matched on the bourses of the countries at the centre of the euro crisis with the Spainish IBEX losing 2.3% on opening. The MIB in Italy was 2.2% down.
Banking stocks took the brunt of the losses amid an EU and IMF demand that in return for 10 billion euros (£8.56bn), Cyprus impose a tax on savings deposits.
While the terms are yet to be fully agreed by the local government, the move heightened fears of contagion in the euro area as they were seen by investors as a radical departure from previous aid packages which raised the prospect of either direct exposure or a knock-on effect.
For the UK, the turmoil over Cyprus helped the pound recover some lost ground on the euro as sterling gained 1.2p on the single currency.
There was also a positive implication for the cost of servicing the country's sovereign debt as bond yields tumbled, though the benchmark 10 year debt costs rose sharply for nations such as Spain and Portugal which saw increases of more than 4%.
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