The market's focus was on Spain and Greece: protesters clashed with police in Madrid on Tuesday as the government prepared to unveil its 2013 budget on Thursday; and Greeks held a general strike as ministers sought to renegotiate a bailout.

The worries over a worsening in the euro zone's financial crisis have contributed to a sharp rise in volatility on equity markets, leading to the worst day since June for the S&P 500 index on Tuesday and subsequent falls across Asia.

"With the demonstrations in Madrid on Tuesday, the euro zone crisis is intensifying again, and this had an immediate impact on U.S. indexes last night," FXCM analyst Nicolas Cheron said.

Also fuelling negative sentiment, Philadelphia Fed President Charles Plosser said on Tuesday that the Fed's latest monetary stimulus will not do much to boost economic growth or lower unemployment and raises the risk of longer-run inflation.

As a result the MSCI world equity index .MIWD00000PUS was down 0.7 percent at 332.70 points with Europe's blue chip STOXX 50 .STOXX50E opening one percent lower, led by falls in Spanish, Italian and French markets. .IBEX .FTMIB .FCHI

The single currency lost 0.3 percent to $1.2863, having dipped to $1.2856 at one point, its lowest level in two weeks.

Borrowing costs for Italy and Spain were also rising sharply after Italian Prime Minister Mario Monti said he would not run in an election due next year. Spain's prime minister, Mariano Rajoy, also said he would seek an international rescue package - but only if debt financing costs remained too high for too long.

Italian 10-year bond yields were up 9 basis points to 5.2 percent, and equivalent Spanish yields rose 12 basis points to 5.89 percent.

(Reporting by Richard Hubbard; Editing by Alastair Macdonald)

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