Eurozone worries hit stock markets

Investors were shaken by more political uncertainty in the eurozone today, triggering further volatility on the stock markets.

The FTSE 100 Index was flat after Italian borrowing costs remained at unsustainable levels as premier-designate Mario Monti fought to assemble a new government to steer Italy through its debt crisis.

The debt-laden country saw 10-year bond yields hover above the critical 7% mark, in a sign investor confidence in Italy's finances remains low, while Spain's borrowing costs were not far behind ahead of Sunday's election.

Meanwhile, underlying problems facing the 17-nation bloc were highlighted by sluggish growth figures which revealed that gross domestic product grew by 0.2% in the eurozone between July and September.

Louise Cooper, markets analyst at BGC Partners, said: "Terror is stalking the markets and taking hold. Political leaders beware, this crisis is worsening, and worsening dramatically."

While Mr Monti fought to piece together a new government in Italy, Spain saw borrowing costs soar amid uncertainty ahead of this weekend's general election, which should see opposition conservatives come into power.

The rises on bond markets convinced investors to shy away from risky assets and stocks, which have direct or indirect exposures to sovereign debt, including banks and insurance firms.

Royal Bank of Scotland and Barclays fell 3% and 1% respectively while Lloyds Banking Group was down 3%, and Aviva off 1.4%

Meanwhile, economists warned that the eurozone was on the cusp of recession after the dismal third-quarter figures.

Chris Williamson, chief economist at financial information services firm Markit, said the downturn would not be limited to "periphery" countries.

He said: "The combination of weaker global demand, austerity measures and uncertainty caused by the sovereign debt crisis is also likely to cause downturns in both Germany and France, although Italy looks set to be the first of the four largest euro nations to slide back into recession."

The weak sentiment hit oil prices, with Brent crude in London dropping 0.5% to 111.66 US dollars (£70.61) a barrel and sweet crude on the New York Mercantile Exchange falling 0.6% to 97.60 US dollars (£61.73).

The US dollar, seen as a safe haven investment in times of turmoil, was up against most major currencies, including the pound at 1.58.

There was some cheer on the other side of the Atlantic as retail sales grew for the fifth month in a row in the US, offering some positive distraction from the fragile situation in Europe.

PA