Bank shares were in retreat across Europe, driven by fears that Italy will soon be unable to borrow on the international money markets. The euro continued to lose value rapidly and hit a low of $1.388 – it has now lost more than 3 cents against the dollar since Monday morning.
The banks are biggest fallers, because of concerns that the European crisis is spreading to Italy and Spain.
There were heavier losses across Europe. The main Italian index, the FTSE MIB, tumbled by 4.1% – with shares in Italy's biggest bank, Unicredit, being temporarily suspended after falling more than 7%.
In the bond markets, the yield – or interest rate – on Italian 10-year bonds approached 6%, the highest in at least a decade. Spanish yields hit 6.2%. Economists have warned that these borrowing costs are approaching unsustainable levels.
The slump in the euro illustrates the pressure that is building up against the single currency as Europe's debt crisis rumbles on, warned Jane Foley, senior currency strategist at Rabobank International.
U.S. markets were in line with Asian and European stocks, which fell as investors remained overwhelmed by weak economic data, and European officials met in Brussels to discuss fiscal troubles in the euro zone.
After weeks of uncertainty related to bailouts for Greece, the Italian authorities moved to rein in short-selling on the Milan stock exchange as fears mounted that Italy could become the next victim of the sovereign debt crisis.
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"If Italy becomes more of a problem, then it could spiral out of control and cause the much-feared contagion that some have predicted," . "If that is the case, then a global economic slowdown will likely hit our shores here and take the legs out of an already wounded U.S. economy."
Stock markets in Asia also suffered heavy losses overnight, with Japan's Nikkei losing 1.43% and the Hong Kong Hang Seng index dropping by 2.57%.
The Dow Jones industrial average was down 151.44 points, or 1.20 percent, to 12,505.76. The broader Standard & Poor's 500-stock index fell 24.31 points, or 1.81 percent, to 1,319.49. The Nasdaq composite lost 57.19 points, or 2 percent, to 2,802.62.
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