World stocks hit a one-week low on Thursday and Bunds rose as Spain paid more than at any time since 1997 to sell ten-year debt, sparking fears it may join other euro zone peripheral states in being unable to finance itself.
The euro held close to a five-week trough, with concerns about the debt turmoil spreading to commercial banks across the Atlantic and a clash between Germany and France over the ECB's role in tackling the crisis also kept investors jittery.
Many view an expanded role for the central bank as key to stopping a breakup of the single currency zone.
Spain sold 3.6 billion euros of a new ten-year benchmark bond with average yields at a 14-year high of 6.975 percent -- barely below the 7 percent level widely viewed as unsustainable for public finances.
Spain's 10-year yield hit a euro era high above 6.78 percent while the premium investors pay to hold the debt over German benchmarks rose to its highest in the euro's history.
A bond auction in Paris reflected growing concerns France is getting dragged deeper into crisis, with the AAA-rated country's borrowing costs over two and four years jumping by around half a percentage point.
"(The Spain sale) underscores what everyone has seen in the last couple of days," said Marc Ostwald, strategist at Monument Securities.
"The euro zone has got to deliver something which is going to calm markets down and at the moment markets feel like they are being given no comfort whatsoever and this is symptomatic of that."
'THIS CAN'T CARRY ON'
The MSCI world equity index extended losses after the Spanish auction to fall 0.5 percent on the day.
European stocks lost 1.3 percent. The banking sector fell more than 2 percent and emerging stocks dropped half a percent.
Wall Street fell on Wednesday after Fitch Ratings warned it may lower its stable rating outlook for U.S. banks with large capital markets businesses due to fallout from the turmoil in Europe.
Rating peer Moody's earlier downgraded 12 German public sector banks seen as likely to receive less federal government support if needed.
Brent crude oil fell 1.2 percent to $110.56.
Bund futures rose 53 ticks.
The dollar rose 0.4 percent against a basket of major currencies to 78.34.
The euro fell as low as $1.3421.
The euro zone's second-largest economy France, which has become the bloc's latest member to face market scrutiny over its fiscal deficit, called for more aggressive ECB bond purchases.
Germany, however, remains firmly opposed to using the central bank as the lender of last resort, saying it is up to individual governments to put their fiscal houses in order.
"Everyone's looking around saying we should be doing something but no one is making any decisions. It can't carry on like this," said Justin Urquhart Stewart, director at Seven Investment Management.
"But how many weeks have we said that for? Germany needs to lead the way in a euro core, and then think about how we handle the periphery."