In the US, the Dow Jones closed 1.95% lower. Bank stocks were among the hardest hit, with Commerzbank and Deutsche Bank losing 4.8% and 5.8% respectively. Speaking after the London market had closed, chancellor George Osborne said that British banks had "dramatically less" exposure to Greece than in 2012.
"I think they are well prepared for whatever eventualities unfold," he told the House of Commons. Mr Osborne also warned that the Greek crisis was "one of the biggest external economic risks to the British economy".
"I don't think anyone should underestimate the impact a Greek exit from the euro would have on the European economy and the knock on effects on us," he added. The Athens Stock Exchange and Greek banks are closed all week. On the money markets, the euro lost ground against other major global currencies.
Meanwhile, political developments have continued, with the European Commission chief, Jean-Claude Juncker, saying he feels "betrayed" by the "egotism" shown by Greece in the failed debt talks.
'Out of control'
Greece is due to make a €1.6bn payment to the IMF on Tuesday - the same day that its current bailout expires. Last week, talks between Greece and the eurozone countries over bailout terms ended without an agreement, and Prime Minister Alexis Tsipras then called for a referendum on the issue to be held on 5 July.
At the weekend, the Greek government confirmed that banks would be closed all week, and imposed capital controls, limiting bank withdrawals to €60 (£42) a day.
"Greece's decision to shut banks over the weekend is just the most dramatic element of a crisis that has spiralled out of control," said Chris Beauchamp, senior market analyst at IG.
Greece's temporary bank closure is sending investors' money into other European markets, which experts say will continue in the short term, as investors worry about a potential massive default in the country.
They are also concerned that other European economies could suffer similar debt problems, which would further rattle the financial stability in the region. Market watchers say investors are seeking solace in assets which they consider safe bets in times of crisis.
"To a certain extent, we do expect markets to react to this, with peripheral bond yields probably higher, the euro a little bit lower throughout the week and some strength in the safe havens like the Swiss franc and the British pound," David Stubbs from JP Morgan Asset Management told the BBC's Today programme.
But despite worries about the deepening crisis in Greece, market watchers say that European markets are equipped to handle the short-term volatility.
Mr Stubbs added that because the economic situation in the eurozone had improved since 2011, the region's economy should be able to weather the storm. Others agree that the volatility could be short-lived, as investors digest each turn in the long-running saga of the Greek debt crisis.
"Markets have a habit of reacting with fear first, and reassessing later," said Michael Hewson, chief market strategist at CMC Markets. He believes many investors might ride this volatility out.
Potential deal?
Other experts believe that despite the continuing uncertainty and the missed deadlines, Greece could still reach a deal that would avert a financial disaster.
"There is still a feeling within financial markets that a deal can be done here to keep Greece very much within the European Union," Paul Kavanagh, chief executive at Petronas Partners, told the BBC Business Live programme.
He is watching Italian and Spanish bond market action, adding, "Yes, those yields have risen - but they're not in panic territory yet."
bbc.com
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