Spanish bond yields approached 6 percent for the first time in months, while European stocks and the euro fell sharply, as developments in Greece and Spain sent a new wave of anxiety through the ranks of international investors.
The Euro Stoxx 50, a measure of euro zone blue chips, was down 2.3 percent in afternoon trading Wednesday. National indexes were also down, led by the Ibex in Spain, which was down 3.6 percent, and the MIB in Milan, down 3.1 percent. Stock index futures on Wall Street indicated a mild decline at the opening.
The euro was at $1.2852, its lowest level in two weeks, down from $1.2950 late Tuesday in New York.
Spanish bond yields had fallen back from levels thought unsustainable after the European Central Bank announced a plan Sept. 6 to buy the sovereign bonds of debt-strapped euro countries, like Spain and Italy, in amounts sufficient to bring the cost of servicing their debt down to a manageable level.
The renewed spike in borrowing costs indicates that the E.C.B.'s pledge is losing its power to calm markets, at least in the case of Spain. Higher borrowing costs also put pressure on the Spanish government at a time when it is hoping to avoid a full-scale bailout.
The gap between the rates Spain and Italy must pay is growing, with Spain's borrowing costs rising amid new challenges from disgruntled regional authorities and continuing uncertainty over the central government's intentions concerning a possible bailout.
Spain's benchmark 10-year government bond yield rose 25.1 basis points to 5.928 percent on Wednesday afternoon, while Italian 10-years rose 8.2 basis points to 5.135 percent. A basis point is one-hundredth of a percent.
Italy's short-term borrowing costs fell Wednesday at an auction of debt. The Italian Treasury sold 9 billion euros, or $11.6 billion, of six-month debt priced to yield 1.503 percent. That was down from the 1.585 percent it paid to move debt at the last such auction, and was the lowest it has paid for debt of that maturity since March.
Leaders in Greece and Spain are confronting difficult decisions on spending cuts designed to satisfy either international lenders, or the bond markets, and events in the two nations highlighted the growing European backlash against the politics of austerity.
In Greece, where political leaders are seeking to negotiate a new round of cuts to placate their creditors, flights and trains were suspended, and schools and shops closed, as the country prepared for the first big anti-austerity strike since a new coalition government took power in June.
Several thousand people had converged on the Spanish Parliament on Tuesday, where clashes followed with more than 1,000 riot police. Police baton-charged protesters and some demonstrators broke down barricades and threw rocks and bottles.
The results of an independent assessment on the crisis in the country's financial system are due to be released this week, along with next year's budget and plans for new structural reforms.
The country's prime minister, Mariano Rajoy, has said he is considering whether to seek a new rescue package for his troubled country to lower borrowing costs, but only if they stay too high for too long. He has already secured a promise of up to 100 billion euros to salvage the nation's sickly banks.
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said the turmoil in Greece and Spain had added to bearish market sentiment that carried over from comments Tuesday in the United States by Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. Mr. Plosser said the Fed's latest effort to bolster the economy by buying bonds would probably be ineffective and said the central bank could risk its credibility.
"We have budget discussions in Spain, the troika decision in Greece and demonstrations in both places," Mr. Gijsels said, referring to the trio of international lenders, known as the troika, that are negotiating aid to Greece. "That's not helping things."
"I would compare the current situation to August 2010, though," he added, when the world economy was slowing and there were worries about recession and deflation. "This time all the major central banks are pumping money into the system, but back then it was only the Fed."
That liquidity, Mr. Gijsels said, has to go somewhere, and if the real economy is moribund, it is likely go into the financial markets, bidding up prices for financial assets.
As a result, he said, he did not expect the current wave of selling to be sustained.
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