European markets battered by Greek contagion fears

Spanish stocks tumbled more than five per cent yesterday as European markets were singed by fears that the fallout from the Greek debt crisis could spread to other volatile eurozone states.

Spanish Prime Minister José Luis Rodriguez Zapatero dismissed as "absolute madness" rumours circulating in markets that Spain would ask for a €280 billion bailout from the International Monetary Fund.

"What concerns me is that if a rumour of this nature, which is a huge nonsense, causes an immediate effect on our stock market, we are before a very serious act," he told a news conference in Brussels.

The IMF itself said there was "no truth" to rumours of bailout for Spain.

"Bailout or not, contagion is definitely the talk of the town," said James Hughes, an analyst with CMC Markets in London.

Madrid's benchmark Ibex-35 share index closed down 5.41 per cent at 9,859.10 points over the rumours as well as concern that Spain could be hit with credit downgrades from other ratings agencies following a cut by Standard & Poor's last week.

The London FTSE index of leading shares shed 2.56 per cent, while in Paris the CAC 40 lost 3.64 per cent to close at 3,689.29 points and in Frankfurt the DAX gave up 2.60 per cent to finish at 6,006.86.

"The market no longer has confidence" in the eurozone's capacity to deliver, said Pablo Guijarro, a market analyst with Madrid's AFI financial consultancy.

"It's increasingly difficult to believe that a short-term and joint solution is possible" after the Greek debt debacle.

On Sunday, European nations endorsed an unprecedented €110 billion bailout package to save Greece from bankruptcy and shore up the euro single currency.

But senior politicians from around Europe warned Greece yesterday that it must stick rigidly to its planned austerity programme or risk having loans withdrawn, which would push it back to the brink of bankruptcy.

"A fundamental flaw in the (Greek) rescue plan... is that it does too little to reduce contagion risk in a sustainable way," said Marco Annunziata, chief economist of the UniCredit Group.