The DAX, a stock index of Germany's 30 leading blue-chip companies, made gains in early trade but then plunged over 7 percent at one point.
By mid-day Tuesday, the DAX was was at about 5,660, still 4 percent below its previous close.
Continuing last week's global slide, all main European stock markets were showing heavy losses, with London down more than four percent and Paris more than three percent.
The market instability in Asia and Europe follows Wall Street's drop on Monday, where the Dow Jones Industrials index dropped 5 percent - its steepest drop since late 2008. Efforts by US President Barack Obama to calm markets following the United States’ credit rating cut from the top-notch AAA to AA+ failed to quell market jitters.
Experts expressed alarm as they said the European losses were being driven by near panic sales.
"The financial crisis has changed its nature and become even more vicious," said Berenberg Bank chief economist Holger Schmieding.
Investors in European markets have become particularly worried about the debt loads of long suffering countries like Portugal, Greece and Spain
But on Tuesday the debt ratings of France and the United Kingdom were brought into question as well.
"The thinking is if the US (rating) can be downgraded, then the likes of the UK and France could be next in the firing line," said ING debt strategist Padhriaic Garvey. "The threat to the French (top) AAA rating is the most worrying."
All eyes remain firmly focused on the United States where financial regulators were set to meet Tuesday to discuss next steps.