The fast-moving eurozone debt drama hit global markets for a second day yesterday, with the euro down, rates in high risk bonds up and stocks struggling to claw back losses.
European stocks rallied slightly in late trading after two days of big losses and on Wall Street, trading in shares was mixed.
The stock retreat faltered just as eurozone leaders hinted at a crisis summit meeting in the next few days and the Italian Finance Minister left a meeting in Brussels to work urgently on Italian budget reforms.
The eurozone debt crisis, which had sparked international bailouts of Ireland, Greece and Portugal last year, is now spreading tentacles around big EU economies in Italy and Spain. Analysts now discuss openly the possibility that the eurozone could begin breaking up.
The benchmark FTSE 100 index of top shares in London closed with a loss of 1.02 per cent to 5,968.96 points.
In Frankfurt, the DAX index shed 0.78 per cent at 7,174.14 points and in Paris the CAC 40 lost 0.98 per cent to 3,770.21 points.
In mid-day trading on Wall Street, the Dow Jones industrial average was showing a gain of 0.07 per cent, with analysts saying the eurozone crisis was weighing heavily on sentiment.
Markets finished sharply lower across Asia yesterday.
The Milan stock market, which slumped on Monday, rallied to show a closing gain of 1.18 per cent. The Spanish Ibex-35 index closed with a loss of 0.70 per cent, after a four-per cent slump on Monday.
The euro was at 1.3999 dollars in late trading, having dropped to a four-month low point against the dollar, from 1.4029 at the close on Monday.
“What looked like a bloodbath this morning has eased off a little as we progress through the European session. Pressures continue to mount for both Italy and Spain,” said Kathleen Brooks of Forex.com
Ms Brooks said that “rumours suggest that the ECB stepped into the market and bought Italian debt, which has taken the edge off Italian bonds, causing the yield to moderate to 5.8 per cent”.
Yields on Italian and Spanish 10-year bonds flirted with new record high levels, putting borrowing effectively out of reach.
A deep split emerged over the critical issue of private investors shouldering part of the cost of a second rescue for Greece, which rating agencies say would trigger a default rating, and which the European Central Bank says would lead it to cut off Greek banks.
Greece said it would not accept any form of default, and Spain strongly attacked the way the whole issue had been raised, saying it was not settled yet, despite reassuring statements from the eurozone overnight on Monday.
There is concern about the impact of any default rating on European banks which hold sovereign debt, and the European Commission said it would support any EU banks failing stress tests on Friday.