World shares fell sharply and the euro hit a two-week low on Wednesday as growing opposition to measures aimed at resolving the euro zone's debt crisis unnerved investors already worried about weak global economic growth.
The selling focused on Spain, where the main share index fell 3.5 per cent and yields on 10-year bonds rose back to six percent, as doubts grew about Madrid's commitment to reform due to violent protests and talk of secession by the wealthy Catalonia region.
A general strike in Greece and signs of discord among top euro zone officials over new policies to tackle the crisis added to investor concerns, taking the gloss off recent moves by the European Central Bank to calm the markets by buying bonds.
"Markets have realised despite reducing a large number of tail risks the ECB's programme is not the solution to all the problems in the euro area," Philip Shaw, economist at Investec, said.
Markets were also reacting to a letter from Germany, Finland and the Netherlands on Tuesday that implied that any rescue funds Spain receives for its banks will remain part of its public debt - a decision which would also affect Ireland.
"Once again, it shows that when the ball is back in the governments' court, I think there's all this room for disappointment," said Tobias Blattner, European economist for Daiwa Capital Markets.
The renewed concerns about the euro zone have caused a sharp rise in volatility on equity markets, and led to the biggest daily drop on the S&P 500 index on Tuesday since June and subsequent falls across Asia on Wednesday.
The MSCI world equity index was down 0.8 per cent at 332.23 points and has retraced most of the gains made after the U.S. Federal Reserve announced a new round of aggressive monetary easing last week.
U.S. stocks were looking to extend their losses when Wall Street opened with stock index futures pointing to a weak open.
In Europe the selling was across the board with the STOXX Europe 600 index down 1.4 per cent, its biggest one-day fall since late July, led by declines in Spanish and Italian markets which fell more than three percent.
The FTSEurofirst 300 had shed 1.5 per cent to 1,103 points, having risen 0.4 per cent on Tuesday. It is still up about eight per cent for the September quarter.
Spain's growing problems, exacerbated by uncertainty over when the government might request an EU bailout, pushed the euro down 0.4 per cent to $1.2850, its lowest level since September 12.
"The Spanish story does seem to be deteriorating. We are seeing Spanish bond yields pushing higher this morning and that's being echoed by a slightly lower euro," said Daragh Maher, currency strategist at HSBC.
Spain's benchmark 10-year bond yields rose 23 basis points to 6.00 per cent, while the cost of insuring the debt against a default has also risen sharply.
But analysts cautioned that the moves came on light turnover with many investors choosing to stay out of the market given the long list of potentially negative news from Madrid this week.
"We've got some major event risks in Spain at the end of the week in Spain and it’s not really worth having the exposure," Peter Chatwell, interest rate strategist at Credit Agricole.
In addition to a tough 2013 budget to be unveiled on Thursday, the government is due to release plans for new structural reforms in the economy and the results of stress tests on the Spanish banking sector.
On Friday ratings agency Moody's will publish its latest review of Spain's credit rating, possibly downgrading the country's debt to junk status.
Madrid is also facing all these challenges in an environment in which its economy is still contracting at a "significant rate", the central bank said on Wednesday.
Economically important Catalonia's decision to hold early elections added to the pressure on Spanish Prime Minister Mariano Rajoy, who conceded in an interview with the Wall Street Journal that he would ask for a bailout if the country's borrowing costs remain too high for too long.
"Ahead of these elections, we will have that classical political paralysis. So I think the government in Catalonia will probably not try its hardest to meet the targets," said Daiwa's Blattner said of goals set for reducing public deficits.
"All the targets for the year as a whole for Spain I think are now under threat."
The stronger dollar and concerns about the global economy added to the European worries to push down oil prices but gold was finding some support from this month's policy easing measures by the world's major central banks.
Brent crude oil futures were down $1.30 to $109.15 a barrel, their second drop in three days, and U.S. crude fell $1.04 to $90.33 per barrel.
Despite the drop, traders said oil was getting some support from the rise in tension between Iran and the West over its nuclear programme, and by worries over possible risks to Middle East supply if hostilities break out in the region.
Three-month copper on the London Metal Exchange was down 1.3 per cent to $8,164.25 per tonne, although this followed a gain of more than 1 per cent on Tuesday.
"With worries about Europe and Spain in focus this week, and lingering anxiety over China's economic growth, we see the risk of gains in Q3 turning out to be a false dawn," said ANZ Bank's metals analyst Nicholas Trevethan.
Gold held above $1,760 an ounce on investor demand after the Fed, the ECB and the Bank of Japan all unveiled bond-buying programmes this month which will provide markets with extra liquidity.
Copyright @ Thomson Reuters 2012