Debt and growth fears send markets into a spin

Fears that the eurozone debt crisis was back on the brink of spiralling out of control combined with mounting nervousness about global growth to trigger a series of falls across Western stock markets yesterday.

European shares fell for a fourth straight session to end the day at an11-month low, while the yields on short-term German bonds briefly fell below 1 per cent for the first time since January as investors sought cover from the crisis engulfing Italy and Spain.

In another sign of the flight to safety, British government bonds yields hit record lows for the third day in a row, while gold, the traditional safe-haven investment in times of stress, struck another record of $1,672.65 per ounce.

Similarly, the central bank of Switzerland announced a surprise cut in interest rates in a bid to reduce the value of the franc, also seen as a safe-haven asset, which is hitting its exporters. The Swiss National Bank described its currency as "massively overvalued" and promised to peg rates at close to 0 per cent.

The pan-European FTSEurofirst 300 index of leading shares fell by 2 per cent to close at its lowest level since the beginning of September. Germany's DAX and France's CAC 40 were each down by around 2 per cent, while in Italy the main share index extended its decline into bear-market territory, defined as a 20 per cent fall from the recent peak. Following yesterday's 1.5 per cent decline, Milan's FTSE MIB index is down more than 24 per cent since the end of April.

In London, the FTSE 100 fell by 2.3 per cent to close at its lowest level since late November last year. "In a word, 'dreadful'," Commerzbank economist Peter Dixon said. "We've got the eurozone crisis, the debt problems in the US, and now the growth outlook itself – it's a toxic combination."

The turmoil came ahead of today's planned auction of two Spanish government bonds, with the Spanish Prime Minister, Jose Zapatero, calling a crisis meeting with top policymakers including the country's economy minister, Elena Salgado.

Across the Mediterranean, Mr Zapatero's Italian counterpart, Silvio Berlusconi, was forced to break his silence and address the crisis in a speech after the markets closed.

The European Commission president, Jose Manuel Barroso, also expressed "deep concern" at the rise in Italian and Spanish borrowing costs, with investors continuing to demand interest rates of more than 6 per cent to lend money to either country. Although off earlier highs, at 6.1 per cent for Italy and 6.27 per cent for Spain, the rates remain within striking distance of the 7 per cent level seen as unsustainable by investors.

Mr Barroso called for a swift implementation of the second Greek rescue package agreed two weeks ago. "[We must] send an unambiguous signal of the euro area's resolve to address the sovereign debt crisis," he said.

To add to the gloom, disappointing economic data in the US heightened concern about the pace of the recovery in the global economy. The questions over growth heightened the sense of turmoil in Europe and ensured a sell-off on the Dow Jones Industrial Average, which was around 100 points lower in early-afternoon trading.