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European share values have seen more dramatic falls, following similar sell-offs in the US and Asia.
But in a volatile morning's trading, indexes like London's FTSE 100, that had fallen up to 5.5%, were positive by lunchtime.
Traders remain on edge about the levels of debt facing the US and some eurozone countries, and the impact this could have on their already weak economies.
Bank shares remained among the worst hit with RBS down 7.5%.
However, there was better news on the bond markets where the yield on both Spanish and Italian government bonds fell for the second day.
The European Central Bank (ECB) has begun intervening in the markets to try to keep the cost of borrowing down for the two countries, which are struggling to avoid a Greece-style bail-out by the authorities.
Major crisisThe head of the European Central Bank, Jean-Claude Trichet, defended his institution's decision: "It is the worst crisis since World War II and it could have been the worst crisis since World War I if leaders hadn't taken the important decisions," he said in an interview with the French radio station, Europe 1.
But Mr Trichet indicated that the main responsibility for fighting the debt crisis lay with eurozone governments and not the central bank.
The eurozone is planning to beef up the powers of the European Financial Stability Facility (EFSF) so that it can start to support government bonds by buying them on the open market. Individual governments need to ratify the proposals and delays in doing so have only added to the current uncertainty.
Meanwhile Spain's finance minister, Elena Salgado, has again insisted her country does not need a bailout, saying that Spain's total debt was 20 percentage points below the EU average at around 64% of Spanish GDP.
There are also growing worries about US government debt, which caused its credit rating to be downgraded from the top triple A grade - a move that lead to severe falls on Monday of between 3%-5% for European share markets and a 5.6% fall for the US Dow Jones index - its biggest in three years, with bank shares leading the way down.
Bank of America closed down 20% in US trading, with other major banks also badly hit.
Traders are hoping for help from the US central bank, the Federal Reserve, whose open markets committee (FOMC) is holding a policy meeting later on Tuesday.
Stephanie Flanders assess the options facing US and eurozone leaders
Giles Watts, head of equities at City Index said: "All eyes will now be on the Federal Reserve tonight, which must instil a bit of confidence in the market and tonight's FOMC decision gives it the perfect platform to do so."
On Tuesday, Asian markets suffered further steep falls, although they had recovered around half of their overnight losses by the close.
The Nikkei finished down 1.7%, South Korea's Kospi down 3.64%, and Hong Kong's Hang Seng down 2.8%.
Lacking options
Alan Brown, chief investment officer of Schroders, told the BBC that investors could see no way out of the current troubles.
"The underlying story is all of the weak economic data that we've seen across the eurozone and the UK and the US over the past several weeks," he said.
"I think that investors are recognising that the authorities have very few policy levers left. They have exhausted fiscal options, interest rates in most places are at rock bottom. That is why markets are very nervous."
But Mr Brown said the ECB's moves to support Spain and Italy were "potentially very helpful".
"If they are able to keep a lid on yields in Italy and Spain then they will succeed in stopping the markets creating their own reality whereby they drive yields on Italian and Spanish debt to levels which would cause solvency problems in those countries."
"What's rocking the market is a growth scare," said Kathleen Gaffney of Loomis Sayles.
She said investors were concerned about "how Europe and the US are going to work their way out of a high debt burden" if the global economy slows.
Crude oil prices continued to slide amid concerns that if the economy did slow down, demand would wane in coming months.
Brent crude fell to a six-month low below $100 a barrel before rebounding to $103.31.
However, gold hit another new record of $1,771 an ounce as investors looked for assets that are considered to be less risky. The Swiss franc also gained.
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