European equities sank yesterday and the euro hit a new two-year dollar low, as sentiment was jarred by spiking Spanish bond yields and eurozone debt fears.

Madrid stocks slumped and Spanish 10-year bond yields surged back towards the danger level of seven per cent, as investor enthusiasm evaporated over the government’s €65 billion package of austerity measures.

The Spanish IBEX 35 index of top companies tumbled 2.58 per cent to 6,630.1 points. Shares in recently nationalised Bankia slid 9.33 per cent to close at €0.70.

Elsewhere in Europe, London’s benchmark FTSE 100 index of top companies fell 0.99 per cent to 5,664.43 points, Frankfurt’s DAX 30 dropped 0.53 per cent to 6,419.35 points while in Paris the CAC 40 fell 0.70 per cent to 3,135.18 points.

Rome’s FTSE Mib index dipped two per cent at 13,584 points, despite news of a successful €7.5-billion Italian government bond sale.

And the European single currency, after falling to $1.2167 – the lowest level since late June 2010, recovered slightly to $1.2205. The euro was at 1.2238 late on Wednesday.

The dollar fell to 79.26 Japanese yen from 79.74 yen on Wednesday.

US stock markets also slipped, as traders shrugged off data showing US unemployment claims fell to their lowest level since March 2008.

The Dow Jones Industrial Average fell 0.33 per cent, the S&P 500 was down 0.59 per cent and the Nasdaq was down 1.12 per cent in midday trade.

The Labour Department reported 350,000 initial jobless claims were filed in the holiday-shortened week ending July 7. That was a decrease of 26,000 from the prior week’s upwardly revised number of 376,000.

“We are in a hesitant market that has no illusions and is moving without any real direction,” said Xavier de Villepion, trader at Global Equities.

Traders said that Wednesday’s Spanish austerity measures had failed to alleviate eurozone debt crisis fears, while the US Federal Reserve appeared unlikely to deliver any further stimulus measures any time soon.

“Spanish bonds are under renewed... pressure as investors doubt the wisdom of the latest fiscal consolidation measures announced by the government,” RIA Capital Markets analyst Nick Stamenkovic said.

“Indeed, the risk is that the latest budget deficit reduction measures compound the worsening growth outlook and deteriorating fiscal dynamics. Hence the euro is moving to new lows as confidence in the single currency continues to ebb away.”

In Paris meanwhile shares in the French carmaker PSA Peugeot Citroen fell below the seven euro mark to a more than two-decade low after the company announced 8,000 job cuts, though it ended the session at €7.02.

Shares in French retailer Carrefour jumped 6.97 per cent to €14.12 after the company maintained its profit outlook for 2012.

But traders were mostly on the back foot after minutes from the most recent US Federal Reserve June meeting suggested that officials were split on further stimulus measures to aid the American economy.

Across in Asia, stock markets mostly plunged yesterday on growing fears of a regional slowdown after South Korea unexpectedly cut interest rates and Japan’s central bank also failed to announce major new stimulus measures.

The news spooked investors who were already nervous a day before China releases key data expected to confirm slowing growth in the world’s second-biggest economy.

Hong Kong dropped 2.03 per cent, Seoul closed down 2.24 per cent, Sydney fell 0.70 per cent and Tokyo fell 1.48 per cent, but Shanghai eked out a gain of 0.46 per cent.

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