London's key FTSE 100 index plunged on Thursday, losing 2.7 per cent by late morning, following the second intervention this week to suspend trading on China's stock markets.
The FTSE fell 162.4 points to 5,911, while Germany's DAX lost 3.2 per cent, as European and Asian markets were again hit by China's woes.
Thursday's drop in Chinese share prices triggered an automatic halt in trading for the second time this week, as the authorities introduced new measures to restrict share sales.
Prices on the CSI 300 Index plummeted more than 7 per cent in the first 30 minutes of trading following a further devaluation of the Chinese currency, the yuan, which hit its weakest level in nearly five years, official data showed.
The CSI 300 comprises the 300 largest firms listed on the mainland.
The new "circuit breaker" mechanism stops trading for 15 minutes if prices on the index fall more then 5 per cent, and stops trading for the day if prices fall more than 7 per cent.
The mechanism also stopped trading for the day on Monday, the first trading day of the year.
China Thursday issued new rules to restrict share sales. Major shareholders must not sell more than 1 per cent of a listed company's share capital every three months, according to a notice on the website of the China Securities Regulatory Commission.
The negative sentiment on the Chinese mainland spread to other major Asian markets.
Japanese shares were dragged down by a stronger yen and the heavy losses in China.
The benchmark Nikkei 225 Stock Average lost 423.98 points, or 2.33 per cent, to end at 17,767.34, hitting the lowest in three months. The broader Topix index was down 30.9 points, or 2.08 per cent, at 1,457.94.
The main indexes of the Hong Kong stock exchange were down over 2.5 per cent.
The routs this week followed disappointing results released from China's manufacturing sector, and come amid doubts about the overall strength of the Chinese economy.
Analysts say China may not meet its growth target for 2015 of about 7 per cent.
The circuit breaker mechanism was introduced this year after volatility on the Shanghai stock exchange sent jitters through global markets in the second half of 2015, and led to a host of official measures to shore up prices.
The circuit breaker was designed "to comfort panic in the market," according to Shanghai-based independent analyst Ye Tan.
"It will be somewhat effective at this very bad moment of panic and low market liquidity, but it won't work for long. What will happen in three months? If trading is suspended for many days of the year, the market will collapse," Ye said.