The price of oil has surged to a fresh high passing the $140 a barrel level.
Light sweet crude for August delivery touched $140.39 on the New York Mercantile Exchange before edging down from this record level.
The combination of soaring oil prices, inflation and fears about the global economy sent stock markets tumbling.
In the US, the Dow Jones industrial average closed down 3.03% at 11,453.4, taking the index to its lowest close since September 2006.
Added pressure
The spike in the price of oil followed comments from the producers' organisation Opec about the prospect of oil at $170 a barrel this summer.
Oil producer Libya added to the pressure after signalling it may cut output, while a falling US dollar also pushed up the price of crude.
Analysts said a raft of bad news about the health of corporate America, the impact of higher oil on company profits and fears about US financial sector hurt investor confidence.
"I felt we were going to have a garden variety recession, but if oil goes up goes up to $170 and stays in the $170 area, who knows," said Al Goldman, chief market strategist at Wachovia Securities.
General Motors shares fell to their lowest level in 30 years after analysts gave a gloomy outlook for the auto giant.
Global banking giant Citigroup fell too after a downbeat assessment for the sector, while shares in Belgian bank Fortis fell sharply after it announced a rights issue to shore up its finances.
Gloom spread to the technology sector, where software company Oracle and Blackberry maker Research In Motion painted a pessimistic picture for the future.
