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The benchmark Hang Seng Index fell 536.48 points to 23,148.53, its largest drop in three months, on turnover of HK$87.76 billion ($11.32 billion).
The shares tumbled as Spanish Prime Minister Mariano Rajoy came under pressure on Monday to step down over a corruption scandal.
Meanwhile former Italian premier Silvio Berlusconi vowed to throw a spanner in the works of a government austerity drive as his party showed solid gains in polls before a general election.
"The spectre of Europe is rearing its ugly head as political risk threatens to derail structural reforms," Joshua Tan, head of research at PhillipCapital, said in a note.
HSBC dropped 2.7 percent to HK$85.45 on renewed jitters about Europe, while Asia's largest oil refiner Sinopec tumbled 6.4 percent to HK$8.74 on its unexpected and deeply-discounted share placement to raise HK$24 billion.
But the worst-performing sector was Hong Kong property stocks, due to fears of fresh government measures to curb runaway home prices.
Henderson Land tumbled 3.9 percent to HK$53.50, New World Development closed down 4.0 percent at HK$13.84, and SHK Properties fell 3.2 percent to HK$121.30.
In China shares closed up 0.20 percent as investors selectively bought property and liquor stocks.
The benchmark Shanghai Composite Index ended up 4.98 points at 2,433.13 on turnover of 127.1 billion yuan ($20.4 billion), after falling more than one percent earlier in the session.
The central bank's record single-day liquidity injection of 450 billion yuan into the money market helped stocks, analysts said.
"The injection by the central bank was mainly to ease tight liquidity conditions at financial institutions before the Chinese New Year," Zheshang Securities analyst Zhang Yanbing told AFP.
"But it also helped lift sentiment as investors hope more funds may flow into the stock market."
Friday is the last day of business for China's financial markets before the Chinese New Year holiday.
Liquor stocks rose on bargain-hunting. Kweichow Moutai gained 5.31 percent to 184.43 yuan, Shanxi Xinghuacun Fen Wine Factory advanced 4.36 percent to 34.92 yuan and Hengshui Laobaigan Liquor rose 3.95 percent to 39.21 yuan.
Property developers rose on hopes for strong sales. Gemdale jumped 7.62 percent to 8.19 yuan while Poly Real Estate rose 2.21 percent to 13.42 yuan.
-- Dow Jones Newswires contributed to this report --