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The UK's cost of borrowing plunged to an all-time low yesterday as panicking investors sought safe havens from the financial firestorm engulfing Spain.

Investors piled into UK gilts as the embattled eurozone member's economic woes deepened and markets panicked over the latest threat to Madrid's creaking finances from struggling regional governments.

Global stock markets tumbled as Spain's cost of borrowing hit a euro-era high of 7.44 per cent – well into the territory which forced Greece, Ireland and Portugal to seek a bailout from the European Union and International Monetary Fund.

In contrast, the UK's cost of borrowing hit a record low 1.4 per cent – well below the current 2.4 per cent rate of inflation – as nervous dealers shunned returns on their cash and simply looked for shelter from the latest storm. German bunds were in even greater demand as the eurozone powerhouse's benchmark, 10-year borrowing costs sank to 1.15 per cent.

Lloyds Bank Corporate Markets bond analyst Eric Wand said UK gilts had been bolstered in recent days by the prospect of another rate cut from the Bank of England, depending on the success of its Funding for Lending scheme to boost corporate credit. But he added: "I'd say 70 per cent of what we're seeing is all about Spain and the safe-haven effect.

"Spain has been trying to get around their funding issues by issuing shorter-term debt this year, but the really worrying thing for them is they're paying so much for it. That can't continue in the medium term. If we carry on like this, it's going to get very messy."

Spain's Economy Minister, Luis de Guindos, is due in Berlin today for talks with the German Finance Minister, Wolfgang Schäuble. Spain's stock market crashed more than 4 per cent at one point on a turbulent day for global markets which saw the FTSE 100 close down more than 2 per cent at 5,533.9.

The sell-off in Madrid reached such a pitch that Spain's market watchdog stepped in to ban investors from short-selling.

Vincent Forest of the Economist Intelligence Unit, said: "The economic contraction is now accelerating and will have a significant negative impact on public revenue."