A devastating 8.9-magnitude earth quake rocked Japan at 0546 GMT, unleashing a 10-metre high tsunami that tossed ships inland and sparked fears that destructive waves could hit across the Pacific Ocean.
The death toll from the earthquake has reached 40, with another 39 people missing and 244 injured, according to Japan's National Police Agency.
"A perfect storm batters markets," said analyst Kathleen Brooks at trading site Forex.com.
"Three factors are weighing on market sentiment today: the Japanese earthquake, Spain's sovereign debt downgrade yesterday (and) continuing problems in the Middle East and the threat this poses to oil supplies."
"This is having a major impact on stocks, foreign exchange and commodities," she added.
Asian stock markets plunged, with Tokyo diving 1.72 percent and Hong Kong losing 1.55 percent, while shares sank 1.17 percent in New Zealand, where a fatal quake had killed hundreds in Christchurch last month.
In late morning European deals, the London market lost 0.53 percent, Frankfurt dived 1.09 percent and Paris shed 1.02 percent in value.
The biggest loser in Europe was the insurance sector, which tumbled as traders worried over the prospect of costly claims from the earthquake -- which was the most powerful ever recorded in Japan.
"It is the insurers that have been worst hit by the weaker session today as traders fretted about likely exposures to the Japanese earthquake and tsunami," said City Index analyst Joshua Raymond.
"The destruction in Japan is convincing investors to cash in some of their (recent) gains in insurance firms, particularly considering it is too early to know exactly what liabilities will be placed on firms as a result of the destruction caused in the region and surrounding areas just yet."
Markets had already been given a poor cue on Wall Street, which sank heavily on Thursday on worries over higher oil prices and slowing economic growth, with the Dow, Nasdaq and S&P 500 indexes all losing more than 1.8 percent.
In foreign exchange trade, the yen sank to $83.30, the lowest point for two and a half weeks, before rebounding sharply as dealers sought a safe haven for their cash.
"The initial response of the market was to sell the yen. After due consideration investors decided it was not an economy-threatening event and returned the yen to its pre-quake levels," said MoneyCorp analysts in London.
Prior to news of Japan's quake, global markets were already on edge before a eurozone summit in Brussels and amid fresh unrest in the oil-producing Middle East and North Africa region.
The eurozone debt crisis escalated this week when Moody's slashed Greece's debt ratings and then downgraded Spain on Thursday -- the latest in a long list of warnings based on fears that some countries may not repay their debts.
Eurozone leaders are expected to agree on greater economic policy coordination later on Friday as they try to tame a deep-seated debt crisis made worse by markets sceptical that they can stop the rot.
"This morning, markets have drifted even lower after Japan is hit by an earthquake and one has to think when is all this going to stop," said Capital Spreads analyst Simon Denham.
"Earthquakes, tsunamis, sovereign debt crises and civil wars mean investing in equities is not a safe place to be."
World oil prices dropped on Friday, despite unrest in the world's biggest crude exporter Saudi Arabia, as dealers banked profits ahead of the weekend.
Oil had spiked to 2.5-year highs in recent days amid escalating violence and supply shortfalls in Libya, a major producer and exporter of crude.
