Investors took fright on the news that a radiation leak was detected at a crippled power plant and residents were warned to stay indoors. The benchmark Nikkei 225 stock average sank a staggering 10.6 percent — more than 1,000 points — to close at 8,605.15 after hitting a midday low of 8,227.63 points, more than 14 percent down.

Following on from Monday's 6 percent decline, the first trading day since the devastating earthquake and tsunami struck the northeastern coast, the Nikkei has now suffered its worst two-day trading losses for 40 years.

The chill was felt across all markets, with the yen boosted by Japanese investors repatriating funds as a precautionary measure against risk and to pay for reconstruction. Oil prices took another hit on fears over the impact on global consumption.

In early European trading, stocks took a battering, with German stocks the worst performing — Germany has relatively big economic ties with Japan. The country's main DAX index was down 5.1 percent at 6,517, with many of the country's industrial giants like BMW AG, Volkswagen AG and Daimler AG trading down by even more.

France's CAC-40 slid 4.1 percent to 3,719, with leading nuclear reactor manufacturer Areva down more than 9 percent. Britain's FTSE 100 index fell 3 percent to 5,601.

The heavy selling is poised to continue at the Wall Street open, even though the Federal Reserve is expected later to sound cautiously optimistic about the U.S. recovery. Dow futures were down 250 points, or 2.1 percent, at 11,676 while the broader Standard & Poor's 500 futures slid 32.30 points, or 2.5 percent, to 1,258.10.