Caution grew on the back of Monday's data showing growth in U.S. factory activity slipped in November to the lowest since January and after Federal Reserve policy makers gave a sober assessment of the world's biggest economy.
Investors have also settled into a pattern of blowing hot and cold with sentiment, lifted by hopes for further interest rate cuts and depressed by poor data and a continuing drip of fear about the credit market.
Brokers Punk Ziegel downgraded Bear Stearns (BSC.N: Quote, Profile, Research), Goldman Sachs (GS.N: Quote, Profile, Research) and Lehman Brothers (LEH.N: Quote, Profile, Research) to "sell" from "market perform," saying the retrenchment under way will force significant adjustments in the way the businesses are being run. This led to expectations of more angst on Wall Street.
MSCI's main world stock index was down 0.3 percent on the day, held up from deeper losses by its emerging market components. Emerging markets were bucking the general downward trend with a 0.1 percent gain.
European shares fell, led lower by handset maker Nokia and steelmaker ThyssenKrupp, whose updates left investors unimpressed. The FTSEurofirst 300 index of top European shares was down 1.4 percent.
Focus was also on interest rates with European Central Bank seen holding and some betting on a Bank of England cut on Thursday. The Fed is widely expected to cut next week.
Earlier, economy-sensitive machinery and shipping shares dragged Japanese stocks lower. The benchmark Nikkei closed down 0.95 percent to 15,480.19, down 148.78. The broader TOPIX finished down 1.09 percent at 1,515.50.