Spain's debt yields broke above 6 percent on Monday as investors worried about its budget, knocking the euro and sending safe-haven German bonds to a record last set at the height of the euro zone crisis.
Signs of slowing global growth also undermined sentiment in commodity markets while European equity markets were mostly in positive territory after sharp falls last week.
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Spanish stocks were lower, however, reflecting concerns about the country's ability to finance its deficit and debt with borrowing costs on the rise.
"We're back in full crisis mode," Rabobank strategist Lyn Graham-Taylor said.
"It is looking more and more likely that Spain is going to have some form of a bailout."
Mixed signals from the European Central Bank (ECB) over its willingness to help the market by restarting a special bond buying program and news Spanish banks have been heavy borrowers of cheap ECB funds also undermined confidence.
Spain's 10-year bonds were up 16 basis points at 6.15 percent, five-year yields topped 5 percent, while two-year yields spiked to 3.70 percent, all highs for this year.
Six percent was last reached in December and is psychologically important for markets. The rise typically accelerates after that level, putting yields on course for 7 percent beyond which debt costs are seen as unsustainable.
The cost of insuring Spanish debt against default also hit record highs in early trading. Spain will auction 12- and 18-month Treasury bills and two-year and 10-year bonds on Thursday.
Contagion fears also pushed Italian 10-year bonds higher.
The euro fell below a key level at $1.30 on the concerns about Spain to hit $1.2995, its lowest in two months, before recovering to be down 0.4 percent at $1.3010.
German bond prices gained and yields on the benchmark 10-year Bund, viewed as the euro zone's safest debt, hit a record low of 1.628 percent.
The previous record was set in November last year at the height of the debt crisis, just before the ECB injected around 1 trillion euros of cheap three-year funds into the region's banking system.
European equity markets were mostly higher in early Monday trading, after seeing sharp falls last week when the concerns over Spain first resurfaced.
The FTSE Eurofirst .FTEU3 index of top European shares was up 0.3 points 1,030.69 after closing 1.6 percent lower on Friday, to post its fourth straight weekly loss. Spain IBEX 35 Index .IBEX was down 0.45 percent at 7217.60.
The MSCI global equity index .MIWD00000PUS was around 0.3 percent lower after a selloff sparked by disappointing China growth data which also sent U.S. shares down sharply on Friday.
China doubled the size of the yuan's permitted trading band over the weekend, a key reform in the process of liberalizing nascent financial markets, but it had little impact.
Oil and metals prices were suffering from the worries about Spain, but were also hit by the signs of slowing demand from China and fears U.S. consumer demand was being hurt by high gasoline prices.
The dollar index .DXY against a basket of other currencies was up 0.27 percent on Monday.
The dollar's strength also makes commodities more expensive for consumers using other currencies, putting prices under pressure.
"The market in general is feeling a bit risk-averse and we can see commodities weaker across the board," said Nick Trevethan, senior commodity strategist at ANZ in Singapore.
Front-month Brent crude slipped $1.28 to $119.93 a barrel while U.S. crude oil slipped 79 cents to $102.05 a barrel.
Spot gold fell 1 percent to a one-week low of $1,640.64 an ounce, before recovering slightly.
(Additional reporting by Anirban Nag and Marius Zaharia; editing by Anna Willard)
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