Investors have been unnerved by downgrades of Greek and Italian goverment debt and the heavy defeat of Spain's ruling Socialists in local and regional elections as punishment for its handling of the economy.
In Europe the FTSE 100 index of leading UK shares dropped 97 points - or 1.6pc - to 5852.17 as trading started in the US. Bourses in Germany, France, Spain, Italy and Greece fell heavily, while yields on Greek government bonds rose to the fresh highs. Earlier, stocks in Asia fell heavily with the Nikkei sliding 1.5pc and the Hang Seng 2.1pc.
Fitch Ratings' downgrade of Greece's credit rating on Friday and Standard & Poor's cut its outlook for Italy to "negative" from "stable" on Saturday. S&P's main concern was that any possible restructuring of Greek debt could have contagion effects for other peripheral countries in the eurozone.
"Spain is back in focus in relation to debt and that is really a concern for the markets -- it's weighing on the euro, on risk sentiment in general and on commodities," Danske Bank analyst Christin Tuxen said.
The euro fell to a two-month low against the dollar and a record low against the Swiss franc. Spain's attempt to strengthen its finances through harsh austerity measure to appease financial markets has angered voters who are paying the price. Spanish unemployment is 21.3pc, the highest in the eurozone.
Sentiment over the eurozone has been hit by recent figures from China showing growth slowing and a lacklustre recovery in the US. Fears of slowing demand has hit commodity prices with oil, copper, silver and gold prices sliding and dragged down mining stocks.
"We are slightly cautious on the market over the next three to six months over a lack of clarity over the bigger macro issues such as the European sovereign debt," said Neil Tong, head of UK equities at Alliance Trust.
Reacting to the downgrade, Greece ruled out a debt restructuring ahead of a Cabinet meeting called for today to reach agreement on tougher austerity measures with bigger cuts in public sector wages, along with tax increases and the privatisation of state assets to meet the terms of its $110bn (£68bn) bail-out.
Prime Minister George Papandreou, supported by two leading members of the European Central Bank (ECB), made it clear there was no prospect of support for a debt restructuring to ease the pain.
The harsher measures risks further civil unrest and have failed to persuade financial markets the Greece can reduce its debt mountain. Talk of a default or a "soft restructuring" have unnerved markets while the ECB fears further damage to the euro and a new banking crisis in Athens if there is any tinkering with the package.
Mr Papandreou says he is ready to take any steps necessary to safeguard the bail-out funding. He said: "Greece must convince everyone of its determination." ( Source www.telegraph.co.uk )
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