Stock markets across Europe plummeted on Tuesday and the euro dropped to a near four-year low against the dollar over new concerns about escalation of the eurozone debt crisis.
Investors' worries about insolvency in Spain's banking sector following last weekend's government bailout of regional savings bank Cajasur and the economic woes of Spanish banks spreading to other eurozone nations and creating a financial crisis triggered a massive sell-off of shares from Dublin to Madrid.
After the Cajasur rescue, four other Spanish banks announced their intention to merge and form a new group to strengthen their solvency and assets.
But market analysts said there are several other banks like Cajasur with huge exposure to Spain's troubled real estate and construction business and the risk of insolvency among those banks is great.
Europe's banking system is facing a major challenge to prevent a sovereign fund crisis from becoming a financial crisis, said Ewald Novotny, a member of the council of the European Central Bank.
The Euro-Stoxx-600 bank index on Tuesday dropped to its lowest level in ten months and the shares of major European banks suffered heavy losses.
The International Monetary Fund's (IMF) appeal to the Spanish government on Monday that it needed "comprehensive and far-reaching" economic reforms also contributed to volatility in the markets, with some traders interpreting it as a "coded warning" that Spain may default on its debts.
Investors were also concerned that the massive 750 billion euro (nearly $1 trillion) financial rescue package for the eurozone nations announced two weeks ago by the European Union and the IMF has so far failed to calm down the markets.
In London, the FTSE index dropped by 2.4 per cent to an eight-month low and closed at 4,940.68 points.
In Frankfurt, Germany's benchmark DAX index closed 2.34 per cent lower at 5,670.64 points.
In Paris, the CAC 40 fell by 2.9 per cent, Spain's IBEX index in Madrid by 3.05 per cent, the Zurich SMI index by 1.85 per cent and Lisbon's BVL index by 2.65 per cent The euro dropped by 0.8 per cent to close at 1.228 against the dollar in European trading.
Even though the decline was not as strong as in Monday's trading, the single currency was not far away from a four-year low of 1.2143 dollars reached last week.