Stocks have taken a battering while the euro slid to a two-year low against the dollar as fears over Europe's debt crisis returned to haunt markets.
The euro fell to a near 12-year low against the yen on Monday. The US Dow Jones industrial average was down 1.1 per cent and the broader S&P 500 index fell by 1.3 per cent.
The catalyst to the day's dramatic falls was the sharp increase in the yield on Spain's benchmark 10-year bond to well above seven per cent. If it remains around that level, investors believe the eurozone's fourth-largest economy will likely need a financial rescue like Greece, Ireland and Portugal.
Spain is the epicentre of the current bout of fears, with investors increasingly concerned that the country will not be able to turn its public finances around without outside help.
Greece remains in the spotlight with investors increasingly skeptical about its future within the 17-country eurozone.
Spain's 10-year borrowing rate rose 0.21 percentage points to close at 7.43 per cent, having traded as high as 7.51 per cent its highest level since the euro was established in 1999.
"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 regions within Spain, markets have started the week on a sour note.
In Europe, the FTSE 100 index of leading British shares closed down 2.1per cent at 5,533.87 while Germany's DAX fell 3.2 per cent to 6,419.33. The CAC-40 in France lost 2.9 per cent at 3,101.53.
While markets were tanking, Spain and Italy announced temporary bans on the short-selling of stocks whereby investors are prohibited from selling stocks they don't already own.
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The decision by the Spanish regulator to ban the practice for three months helped contain the fallout on the Madrid exchange but did little to encourage traders elsewhere. Italy's FTSE MIB also retraced losses after the country's regulator reintroduced a ban on the short-selling of financial stocks for this week.
Madrid's IBEX closed down 1.1 per cent and Milan's FTSE MIB 2.8 per cent. Andrew Wilkinson, chief economic strategist at Miller Tabak & Co, said the price action across Europe since the Spanish ban was announced indicates that some investors were caught on the hop, and specifically had to unwind certain German positions in response.
"The DAX fell by a further 1.7 per cent from its position at the time of the announcement," Wilkinson said.
Though Spain is at the forefront of concerns at the moment, investors are worried that Italy will also struggle with its debts. Its 10-year yield rose 0.25 percentage points to 6.32 per cent.
The wave of selling was not just confined to Europe. In the US, the Dow Jones industrial average was down 1.1 per cent at 12,680.33 while the broader S&P 500 index fell 1.3 per cent to 1,344.87.
The euro was roughly flat at $1.2119 after earlier falling to $1.2066, its lowest level since June 2010. The euro has also fallen to a near 12-year low against the yen.
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. 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 $2.69 a barrel at $88.38.