LONDON — Global stock markets posted sharp declines on Wednesday and the euro dropped to a 22-month low against the dollar on growing concern over a potential Spanish bailout.
European bond rates were also under pressure with those for Spain reaching danger levels on the secondary market and Italy missing its maximum target in a bond sale.
When trading wrapped up, London's benchmark FTSE 100 index had given up 1.74 percent to 5,297.28 points.
In Frankfurt, the DAX 30 was 1.81 percent lower at 6,280.80 points, while in Paris the CAC 40 was down by 2.24 percent at 3,015.58 points.
Madrid's IBEX 35 index plunged by 2.58 percent to a nine-year low of 6,090.40 points as the interest rate on Spanish 10-year government bonds hit 6.703 percent -- which is unsustainable over the longer term.
The European single currency settled at $1.2403 after falling as low as $1.2386 -- a level last seen on July 1, 2010.
US stocks also slumped as the yield on the US Treasury's 10-year bond hit a record low as investors sought safety from Europe's troubles.
In midday trade, the Dow Jones Industrial Average was down by 1.24 percent, the S&P 500 index fell 1.40 percent, while the tech-rich Nasdaq dropped 1.28 percent.
In Asia, Hong Kong stocks tumbled 1.92 percent and Tokyo fell 0.28 percent.
"Today's market movement has all the makings of a bloodbath unless policymakers pull a rabbit out of the hat," commented CMC Markets analyst Michael Hewson.
"This can't go on until the Greek elections," scheduled for June 17, he added. "EU policymakers appear to be doing their best impersonation of a load of rabbits caught in headlights."
German 10-year borrowing rates fell to a record low and the gap with the interest rate which Spain must pay widened to a record as well.
The eurozone bond market was under rising pressure from concern about public finances and the banking system in Spain.
The 10-year rate on the German Bund, a safe haven for institutional investors, fell to 1.283 percent and the gap or risk premium for Spain rose to 5.32 percentage points.
Madrid's economic woes were back in focus as its 10-year borrowing rates approached the 7.0-percent mark that has been described by analysts as a "tipping point".
Economists fear the Spanish government will have to seek an international bailout -- following Greece, Ireland and Portugal -- despite assurances from Prime Minister Mariano Rajoy.
Under pressure from concerns about the Spanish banking system, Italy had to pay higher rates in a bond auction of five- and ten-year debt.
"Investors remain cautious as the next three weeks remain crucial for the future of the European monetary union," said Annalisa Piazza, strategist at Newedge in Milan.
Adding to traders' woes, the European Central Bank has rejected a scheme by Spain to recapitalise its distressed bank Bankia, the Financial Times newspaper reported, citing unnamed European officials.
Bankia, a leading Spanish bank, has appealed for government aid of 19 billion euros ($24 billion) as part of an overall package of 23.5 billion euros to strengthen its cash reserves.
Spain had drawn up a scheme whereby the state would issue debt bonds to Bankia so that the bank could use them as collateral for fresh funding from the ECB, the FT said.
The newspaper added that the ECB had judged this arrangement to be "unacceptable" and amounted to direct financing of the Spanish state by the central bank -- which would violate its statutes.
IG Index analyst Rupert Osborne commented that "throughout the long months of the eurozone crisis, one comforting thought has remained to us all: the common thread linking Greece, Ireland and Portugal was the fact that they were all relatively small economies in the grand scheme of the European project.
"Yet now the crisis looks to have Spain firmly in its grasp, a country that is possibly too big to save."
The European Commission placed Spain Wednesday at the head of a critical list of 12 economies ordered to carry out major reforms this year as it called for big changes throughout the eurozone.
The Commission also urged France to take "effective action" to fulfill its 2013 deficit goal of 3.0 percent of gross domestic product (GDP), saying it would be difficult but "fully achievable."
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