Italy's leading MIB index plunged 5pc and Spain's Ibex fell 3pc amid fears that the eurozone's third and fourth biggest economies were in the grip of a deadly and uncontrollable spiral of debt and recession.
The borrowing costs of both "sinner states" soared. The yield on Italy's benchmark 10-year bonds jumped to 5.7pc, heading into the danger zone that is considered unsustainably high. The equivalent Spanish debt climbed to 6pc. Meanwhile, the yield on safe-haven German bunds was pushed to an almost record low of 1.6pc. UK gilts benefited, too, dropping to 2pc.
The yields reflected a level of fear on the bond markets not seen since the fraught period before Christmas when traders bet that the eurozone could collapse.
France's CAC index fell 3.1pc, Germay's DAX dropped 2.5pc and in London more than £33bn was wiped off the value of Britain's biggest companies as the FTSE 100 fell 2.2pc. In the US, the Dow fell 1.7pc - its worst day so far this year.
Traders returning from the long Easter weekend were initially reacting to poor Chinese trade data and gloomy comments about the recovery by Ben Bernanke, the chairman of the US Federal Reserve.
But alarm spread following reports that Italy would be forced to cut its 2012 growth forecasts, coupled with mounting concerns over Spain.
Business paper Il Sole said it had obtained a report showing that Italy's economy was likely to contract by between 1.3pc and 1.5pc this year - far more than Italian prime minister Mario Monti's 0.4pc prediction.
Miguel Ordonez, head of the Bank of Spain and member of the European Central Bank, was quick to try to blame Rome for the market turmoil. "In Spain there's a focus on the deficit; in Italy, unfortunately, the back-pedalling on the labour reform is creating an enormous anxiety," he said.
But the central banker admitted Spain needed more economic reforms and was "not likely" to see a strong recovery any time soon. He said the ECB's long-term refinancing operation - the bank's effort to inject €1 trillion into the economy - had merely bought the country some breathing space but cutting the deficit was still the main task.
Traders said Mr Ordonez's comments caused the widening spread of Spanish credit default swaps; the instruments sold to insure against a Spanish soveriegn default were close to a record reached in November.
Luis de Guindos, Spain's finance minister, refused to rule out a bail-out. "The Spanish economy is subject to very close monitoring," he said when questioned by reporters.
In Greece, where the start of the tourist high-season was paralysed by ferry strikes, Lucas Papademos is expected to call snap elections as early as today. The prime minister has scheduled a meeting with President Karolos Papoulias at 2pm GMT and is expected to call the elections for May 6 - the first since the eurozone debt crisis tore through the country in 2009.
The Telegraph
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