European shares fell sharply in early trade on Monday as a sell-off in global equities snowballed, and the yen hit three-month highs against the dollar and the euro.

At 0854 GMT, the FTSEurofirst 300 index of top European shares was down 1.8 percent at 1,436.34 points, hitting its lowest since December 5 as investors dumped stocks across sectors.

Shares on Germany's DAX fell 2 percent, the FTSE 100 was down 1.6 percent and the CAC 40 was down 1.7 percent.

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"It looks as if we're starting the week where we left off last week," said Brewin Dolphin's chief strategist, Mike Lenhoff.

"I estimate we're about half-way through a 10 percent correction, and some buyers should start emerging after a 2.5 percent fall," he said.

Earlier, Japanese shares fell 3.3 percent in the Nikkei's biggest fall in nine months.

Global stock markets tumbled last week, threatening to end a bull run that lifted the Morgan Stanley index of world stock markets by 19 percent last year. The index slipped in early trade to its lowest point in more than three months.

The slide started with a 9-percent fall in Chinese markets on Tuesday on talk that the government would clamp down on speculation, but the focus moved rapidly to global stocks.

Lenhoff said the prospect of interest rate increases was an underlying factor for the vulnerability of markets.

"The trigger was China; now that the trigger has been pulled, people are reflecting on the strong economy and continued growth in corporate earnings, and that central banks have a tightening bias," said Lenhoff.

Among conspicuous losers in a weak market were British Airways, slumping more than 6 percent on a newspaper report that of possible strike action.

Europe's biggest bank, HSBC, rose 1 percent, despite profits rising by slightly less than analysts had expected.

Carried Away

Oil fell by 1.5 percent to below $61, trading at $60.74, copper tumbled nearly 3 percent and zinc, nickel and lead all fell sharply, as commodities added to investors' woes.

Key Tokyo gold futures fell by their daily limit for a second straight session, marking their lowest in early two months.

Investors are concerned about an unwinding in the carry trade, or bets on riskier assets financed by borrowing the Japanese currency.

"Momentum has a life of its own. If the yen continues to appreciate, all those in the carry trade will unwind and this could happen fairly quickly," said Lenhoff.

"But rate differentials are still wide, especially given that they are expected to rise in Europe."

Goldman Sachs said that it believed markets would recover from last week's significant jitters

"But it might take some time, and especially the Fed easing that we forecast, before we can look forward to a return to low-volatility upward trending asset markets," it said in a note.

The DAX-NEW volatility index was up 5.9 percent.

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