Greece, Portugal and Spain have all announced cost-cutting measures aimed at reducing the huge deficits they have been running in their national budgets, and  other euro zone countries are predicted to follow suit.

Investors fear that the cuts could damage the European economy, and are pulling money from stocks in favour of safer investments such as gold and government bonds.

The collapse in investor confidence comes after the Greek debt crisis led to the EU and International Monetary Fund to provide a $136bn bailout to the country and forced Athens to announce huge cuts in public spending.

Ebbing confidence

Fears that similar rescue operations will be required for other heavily indebted euro zone countries has caused confidence to ebb away from stock markets, prompting EU finance ministers to agree last week to a $1 trillion package of loans and loan guarantees aimed at reassuring investors.

The announcement prompted a short-lived rally in markets, but initial optimism has proven short-lived, with the euro losing value and stocks beginning to tumble again.

The euro was trading at just $1.22 on Asian currency markets on Monday, and analysts have predicted that its value could plummet to as low as $1.15 in coming months as European countries attempt to rein in their budget deficits.

"Concerns that severe fiscal austerity in the eurozone will crush growth in the region continues to weigh" on the currency, John Kyriakopoulos of National Australia Bank in Sydney said.