Global stock markets reacted badly after Italy's main borrowing rate breached seven per cent [GALLO/GETTY]

Asian stocks have fallen sharply after soaring Italian borrowing costs stoked fears that the debt crisis in the eurozone's third biggest economy will overwhelm its financial defences, raising the risk of a break-up of the currency area.

Japan's Nikkei 225 index fell 2.4 per cent to 8,549.94 and Hong Kong's Hang Seng dived 4.4 per cent to 19,127.04 on Thursday.

South Korea's Kospi slid 3.4 per cent to 1,842.80 and Australia's S&P/ASX 200 lost 2.7 per cent to 4,229.10.

The losses in Asia tracked those in New York, where the Dow Jones industrial average fell almost 400 points, its worst decline since September 22.

The euro was steady after suffering its biggest daily drop in 15 months on Wednesday, while industrial commodities such as copper and oil softened on worries of renewed recession.

Global stock markets were rattled on Wednesday, when Italy's main borrowing rate breached seven per cent.

That was considered an important level because Greece, Portugal and Ireland required bailouts from other nations when interest rates on their bonds hit seven per cent.

"Risk appetite took a severe hit yesterday as eurozone crisis deepened with contagion to Italy," Credit Agricole CIB wrote in a research report.

"Given the sheer size of the Italian bond market ... the impact of its insolvency would be disastrous."

Italy focus

Greece has been the focus of Europe's debt crisis for the past two years.

The country has survived since May 2010 on a $150bn rescue loan package but needs another huge injection of funds to prevent a massive default on its debt.

An earlier breakdown in Greek government talks aimed at avoiding a default on the country's debts further unnerved market investors.

There are fears that a Greek default would lead to huge losses for European banks, and potentially to a global lending freeze.

Italy has for the time being replaced Greece as the biggest source of concern in Europe's two-year-old debt crisis.

As the third-largest economy in Europe, its $2.6 trillion debt is considered too large for other European countries to absorb.

A default could lead to the disintegration of the euro currency used by 17 nations or a debilitating recession.

A pledge by Italy's Prime Minister Silvio Berlusconi to stand down failed to reassure bond markets that Rome has the
will to bring its debts under control.

Moves by two major clearing houses to raise the level of collateral needed for holders of Italian debt pushed the country near breaking point.

Ireland and Portugal were both forced to seek aid soon after their 10-year bond yields topped seven per cent, but a rescue for Italy would be on a different scale and Europe's bailout fund is widely considered inadequate for the task.

Source: Agencies