Global stocks took another pounding Tuesday, while borrowing costs for Spain and Italy spiked higher as investors worried that Europe's debt crisis could infect the continent's larger economies.
The premiums demanded by investors to lend to Rome and Madrid have soared in recent days while eurozone finance ministers have dithered over the shape and size of Greece's next bailout.
The lack of a clear plan for Greece -- and the growing specter that it might be allowed to temporarily default -- has put the eurozone's third- and fourth-largest economies in the spotlight.
Both countries are substantially indebted, and the yields, or interest rates, demanded on their bonds keeps rising, and that only worsens their debt loads. The spread between the yield on Italian 10-year bonds and the benchmark German ones hit 3.1 percent, while Spain's rose to 3.42 percent.
The crisis has raised questions about the future of the euro, and the currency plunged against the dollar Tuesday. By early afternoon, the euro was down another 0.9 percent on the day to $1.3905.
"It's yet again the same old story dominating currency markets today, with the European sovereign debt crisis and fears of contagion causing currency and equity markets to slump. The silence is deafening over a resolution to Greece's current issues," said James Hughes, an analyst from Alpari. "The risk of contagion is again the major talking point with both Spain and Italy being the front runners in the race for the next bailout."
In Europe, France's CAC-40 dove 2.4 percent to 3,718, while Germany's DAX fell 2.1 percent to 7,077. The FTSE index of leading British shares was down 1.4 percent at 5,845.
Italy is in the middle of the current contagion fears and its markets are experiencing extremely volatile trading Tuesday. Shares on the main Milan stock exchange rebounded following an earlier 4 percent slump, when Finance Minister Giulio Tremonti announced plans to accelerate the country's austerity measures. Italy's FTSE MIB was down 0.7 percent only at 18,159.
U.S. shares are also poised for a retreat at the open as they respond to European contagion fears. Dow futures were down 0.7 percent at 12,402, while S&P futures fell 1 percent to 1,306.
But the U.S. markets will also be looking Tuesday for any sign from the Federal Reserve on whether it will undertake more stimulus measures following a run of soft economic data, which culminated in a very weak U.S. jobs report last week.
"Friday's payroll number may have dented sentiment somewhat, but many will be hoping that a positive earnings season will give both the markets and the economy the kick start it needs," said Hughes.
Both the fears that Europe's crisis is spreading and the American economy is dragging have hit Asia hard this week. Earlier, Hong Kong's Hang Seng slid 3.1 percent to 21,663, South Korea's Kospi retreated 2.2 percent to 2,110 and the Shanghai Composite Index lost 1.7 percent to 2,755.
Japan's Nikkei 225 stock average shed 1.4 percent to close at 9,926. Japan's central bank cut its growth estimate for the fiscal year ending March 2012 to 0.4 percent from 0.6 percent. That downgrade is largely a result of the March earthquake and tsunami disasters.
News that the global economy is still struggling dragged oil prices lower.
Benchmark oil for August delivery was down 0.9 percent to $94.28 a barrel in electronic trading on the New York Mercantile Exchange.