European equity markets advanced yesterday but the euro tumbled on fears that debt-plagued Spain could be forced to seek a bailout as sovereign borrowing rates spiked close to danger levels.

At the close, London’s benchmark FTSE 100 index advanced 0.65 per cent to 5,391.14 points, Frankfurt’s DAX 30 added 1.16 per cent to 6,396.84 points and in Paris the CAC 40 rose 1.37 per cent to 3,084.70 points.

Spain’s IBEX 35 index dived 2.34 per cent, however, as the interest rate on Spanish 10-year government bonds surged to almost 6.5 per cent.

Most European shares boosted their gains after the opening on Wall Street where US stocks rose after a long holiday weekend on hopes that China will launch a stimulus programme.

At around 1600 GMT, the Dow rose 0.75 per cent, the S&P 500 index gained 0.68 per cent, while the Nasdaq added 0.68 per cent.

In foreign exchange deals, meanwhile, the European single currency plummeted late in the session to $1.2486 from $1.2541 late in New York on Monday. The dollar eased to 79.45 Japanese yen from 79.47 yen.

“It is not surprising that the Spanish equity market is suffering losses,” said trader Anita Paluch at Gekko Global Markets.

Negative sentiment prevailed, she added, as investors watched Spanish bonds near the seven per cent mark, “a level that is considered a breaking point at which Spain will need to revert to international financial help.”

“It’s actually something we have seen back in the days when Greece, Ireland and Portugal had to be bailed out,” Ms Paluch said.

The risk premium that Spain must pay to borrow compared with benchmark German rates hit a record 5.156 percentage points in mid-day trading amid rising tension over the situation of Spanish banks.

The interest rate that Spain must pay to borrow for 10 years, as indicated by trading in bonds on the secondary market, was nearly 6.5 per cent.

But the German 10-year rate, the lowest in the eurozone, fell to a new record of 1.345 per cent.