With the yield on Spain's benchmark 10-year bond well above 7 per cent, investors are increasingly of the view that the euro area's fourth-largest economy will need a financial rescue like Greece, Ireland and Portugal.
Spain's 10-year borrowing rate rose 0.23 percentage point Monday to 7.45 per cent — its highest level since the euro was established in 1999 and above the level that prompted the other three countries to seek an international rescue.
"Those levels indicate that Spain may soon struggle to fund itself in the market and therefore unless some positive action is taken the country will need a full bailout," said Gary Jenkins, managing director of Swordfish Research.
Coupled with worries that the financial firewall Europe has built up to deal with its debt crisis is insufficient and growing concerns of the financial health of the Spanish regions, markets have started the week on a sour note.
In Europe, the FTSE 100 index of leading British shares was down 1.7 per cent at 5,557 while Germany's DAX fell the same rate to 6,518. The CAC-40 in France was 2.1 per cent lower at 3,128.
Unsurprisingly, Spanish stocks were faring worst of all, with the IBEX 35 down 4.4 per cent. Italian shares weren't doing much better, with Milan's FTSE MIB 3.4 per cent lower. On Friday, stocks in Italy and Spain plunged over 4 per cent and 5 per cent, respectively.
Wall Street was heading for a sharply lower opening too, with Dow futures and the broader S&P 500 futures down 0.9 per cent.
The euro was also taking a battering, trading 0.5 per cent lower at $1.2098. Earlier it had fallen to $1.2081, its lowest level since June 2010. The euro has also fallen to a near 12-year low against the yen.
"What participants will be looking for in order to reverse euro selling is a catalyst, and, so far, finding one that will be net positive could prove to be as well hidden as Spain's outlook looks fragile," said David White, a trader at Spreadex.
A forecast from a Chinese central bank adviser that China's economy could wane further in the third quarter also deepened concerns about the global slowdown. China's economic growth slowed to a three-year low of 7.6 per cent in the second quarter.
Japan's Nikkei fell 1.9 per cent to 8,508.32 and Hong Kong's Hang Seng dived 3 per cent to 19,053.47. China's Shanghai Composite Index shed 1.3 per cent to 2,141.40. South Korea's Kospi dropped 1.8 per cent to 1,789.44
Investors are awaiting quarterly financial results from industry bellwethers around the world — from tech giants Apple, Amazon and Facebook, to automakers and energy firms.
Benchmark crude for September delivery was down $2.61 to $89.23 a barrel in electronic trading on the New York Mercantile Exchange.
Oil prices took a hit too as investors fretted over Europe's debt woes and the global economy, with the benchmark New York rate down $3 a barrel at $88.83.