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Markets plummet as Spain's borrowing costs soar

European stock markets tumbled as fears returned about the state of the Spanish economy and rising political tension in the key eurozone state.

The FTSE 100 fell 91.6 to 5768.1, while the German and French markets fell further still – 1.8 per cent and 2.5 per cent respectively. Spain's Ibex index was the biggest loser of all down 3.92 per cent or 320 points to 7854, with banks Santander and Bankia leading the nosedive. Overall, eurozone markets suffered their worst session in two months.

Benoit Peloille, investment strategist at Natixis, said: "There are still very poor figures and perspectives inside the eurozone. We have a market that has clearly rebounded, and you have some room for a correction, but we think it's not more than that."

During the day, the borrowing costs of Spain soared above the highly symbolic 6 per cent market for 10-year government debt, a level seen as unsustainable by most market analysts.

This is the first time bond prices have risen above 6 per cent for Spain since the European Central Bank (ECB) pledged to be a "backstop" for short-term government debt provided strict conditions are met.

Markets were reacting to the Bank of Spain warning that the Spanish economy was shrinking at a "significant rate" during the third quarter of the year.

This is ahead of an emergency budget to be unveiled on Thursday by the Spanish government as it desperately looks to reassure markets that it is serious about cutting its deficit.

Investors are already jittery about the likely results of the latest stress test of Spanish banks to be released on Friday, with some observers reckoning that more cash may be needed to bail out the country's financial sector than the £80bn already pledged by eurozone finance ministers in June.

Spain also faces calls for independence and snap elections in the Catalonia region. "It can only be a matter of time before Spain is forced into a bailout request," said Michael Hewson, senior analyst at CMC Markets trading group said.

It wasn't just stock markets taking a tumble, the euro fell to a two-week low against the dollar, down 0.35% at $1.2858, having earlier hit $1.2848.