The FTSE 100 extends its decline, down 126 points, or 2.2%, on the day at 5,525.
Russian steelmaker Evraz (EVRE.L) is the biggest faller, down 8.7% or 20.6p at 213p as a sell-off in resources stocks is compounded by Morgan Standley questioning its earnings targets.
Aviva (AV.L), the high-yielding insurer shedding businesses attempting to shore up its capital position, has fallen further, trading 18p, or 6%, lower at 276.
Outsourcer Serco (SRP.L) is the one stock in the FTSE 100 to gain ground, rising modestly to 566.5p.
Fear grips the markets as the economic problems of Greece, Spain and Italy appear to converge. In a sign of the panic Italy has reintroduced a termporary ban on the short selling of financial stocks. Spain's market regulator has banned all shorting of stocks for three months.
Spain’s chances of averting a bailout are fading after the country fell deeper into recession in the second quarter.
Bank of Spain figures show the Spanish economy shrank by 0.4% in April- June after a 0.3% contraction in the first quarter.
Spain’s economy minister Luis de Guindos insists: ‘Spain is a solvent country, there will be no bailout... I believe that Spain is a competitive country. We have a trade surplus with the eurozone, we have a very competitive tourism sector’.
But this stance looks increasingly forlorn with Spain’s borrowing costs surging after investors dumped the country’s government bonds in fear at the country’s growing exposure to its troubled regions. Mercia and Valencia have both said they will tap a government fund and there are reports that six more regions could follow suit.
The yields on Spanish 10-year bond jumped to nearly 7.5%, well beyond the 7% level at which other eurozone countries have required bailouts. The Spanish stock market tumbled 3.5% with the broader Euronext 100 index falling nearly 2%.
De Guindos plans to travel to Germany tomorrow to discuss the crisis with his counterpart Wolfgang Schaeuble.
Spain is locked into a downward spiral with the Bank of Spain’s deputy reiterating the need for more austerity that will further restrict economic growth. ‘We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union,’ said Fernando Restoy.
The situation is deteriorating as authorities fail to keep pace with events. The €100 billion bailout of Spain's banking sector was confirmed on Friday but with the country's indebted regions locked out of the bond markets there is no end in sight to its debt crisis.
Worryingly, there are reports that 10 cities in Italy may also be struggling financially. In an echo of what is happening in Spain, Reuters cites a report in La Stampa newspaper that says government sources believe the cities, including Naples and Palermo, 'are at risk' of default. Although such a default would not immediately increase the country's €2 trillion debt pile, it shows the growing pressure on government finances as the recession bites.
Government bonds in the UK and Germany rose amidst this uncertainty. The 10-year yield on German bunds fell to an all-time low of 1.14%, while in the UK 10-year gilts fell to 1.4%.
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