Initial market enthusiasm over the plan on Friday faded due to legal uncertainty surrounding the pact and the absence of a sufficiently strong financial backstop for the euro zone single currency.
Ratings agency Standard & Poor's put more pressure on investor sentiment after its chief economist said time was running out for the euro zone to resolve its debt problems and that it might need another financial shock to get it moving.
Fitch Ratings said that the meeting of EU leaders last week did little to ease pressure on the region's sovereign debt crisis and the rating agency predicted a "significant economic downturn" across the region.
"The measures were quite positive but the market was looking for a magic bullet and that hasn't happened," said Erik Esselink, fund manager at Invesco Perpetual, which has 5 billion euros under management.
The euro fell 1.5 percent to $1.3180 and borrowing costs for Italy and Spain rose as the EU plan failed to restore market confidence.
Italian 10-year yields briefly threatened to hit 7 percent, a level seen as unsustainable, before peaking at more than 6.8 percent.
European Central Bank intervention helped yields to fall back to 6.60 percent -- still 20 basis points higher on the day.
Investors rushed to the safety of US government debt.
The price of the benchmark 10-year US Treasury note was up 13/32, pushing its yield down to 2.02 percent.
"The pattern is to get optimism leading into these meetings, and almost inevitably we get disappointment," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Nothing really has changed."
Global stocks as measured by MSCI's all-country world index fell 1.8 percent. The FTSEurofirst 300 index of top regional shares in Europe closed down 1.9 percent at 967.49.
Wall Street fell about 2 percent.
The Dow Jones industrial average was down 225.16 points, or 1.85 percent, at 11,959.10.
The Standard & Poor's 500 Index was down 25.71 points, or 2.05 percent, at 1,229.48. The Nasdaq Composite Index was down 48.01 points, or 1.81 percent, at 2,598.84.
Brent crude slipped below $108 per barrel on concerns the European debt crisis will slow economic growth and result in reduced oil demand.
Brent futures for January delivery fell $1.31 to a low of $107.31 a barrel. US crude futures fell $1.61 to$97.80.
"The austerity measures will have a profoundly negative impact on economic growth and will make 2012 a very challenging year in economic terms," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
Spot gold prices fell $47.59 to $1,662.80 an ounce.
