The UK’s FTSE 100 share index fell more than 3%, while in Italy, which has seen Europe’s worst outbreak of the virus, Milan’s stock market plunged 4.5%.
Shares in airlines and travel firms have seen some of the biggest falls.
In contrast, the price of gold hit its highest level in seven years as investors sought a safer place for their money.
Gold prices climbed more than 2% on Monday to about $1,680 an ounce, levels that have not been seen since February 2013.
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“There has been so much complacency in recent weeks from investors, despite clear signs that China’s economy is facing a large hit and that supply chains around the world were being disrupted,” said Russ Mould, investment director at AJ Bell.
“Markets initially wobbled in January, but had quickly bounced back, implying that investors didn’t see the coronavirus as a serious threat to corporate earnings. They may now be reappraising the situation.”
In the UK, the biggest faller in the FTSE 100 was EasyJet, which sank 14%, while Tui and British Airways owner IAG were both down by about 8.5%.
The virus has been around for weeks, so why is it that the financial markets seem to have suddenly started to take it much more seriously?
The developments over the weekend in three countries do raise some pointed questions about how feasible it will be to contain the spread.
South Korea has the largest outbreak outside China; Italy the largest outside Asia. Iran too has seen a surge in cases. Reports of eight deaths there and only 43 cases suggest the spread may be more extensive than the official figures have captured.
If the outbreak turns out to be more widespread than markets have hitherto expected then it would be reflected in an increased impact on industrial supply chains and travel, as a result of official restrictions and personal choices.
It would also magnify the impact on consumer confidence: hence the relatively large falls in stocks dependent on willingness to spend – cars, clothes and durable goods.
Supply fears
The market moves come as companies continue to warn about the effect of the coronavirus on their supply chains and overall financial health.
Associated British Foods, which owns clothing retailer Primark, warned on Monday that there could be shortages of some lines if delays in factory production in China were prolonged because of virus-related shutdowns.
In China itself, officials have said most small businesses have yet to reopen after the authorities extended the Lunar New Year holiday in an effort to contain the spread of the virus.
Only about three out of 10 small and medium-sized enterprises (SMEs) were back to work, while transport problems were preventing workers from travelling and disrupting shipments of raw materials, said industry ministry spokesman Tian Yulong.
SMEs make up about 60% of the Chinese economy.
Analysts said the gold price – which has risen by more than 10% since the start of the year – could breach the $1,700 barrier soon.
“Gold has finally established some serious momentum,” said Jeffrey Halley, senior market analyst at online trading platform Oanda.
Oil prices fell by nearly 4% on Monday, as investors worried about a fall in demand following the temporary factory closures due to the virus.
The price of Brent crude dropped by more than $2 to $56.18 a barrel.
