Spain's Prime Minister yesterday attacked rumours that the country would be forced to ask for a €280bn (£241bn) bailout as "complete madness", as world markets tumbled over the fear that financial contagion was set to spread beyond Greece's borders.
The Spanish markets fell 5.4 per cent on talk that the country would call for an emergency loan. It forced the Prime Minister, Jose Luis Rodriguez Zapatero, to respond: "I was told something about that rumour and the truth is I give it no credit, it is complete madness."
The Spanish premier added: "These rumours can increase differences and hurt the interests of our country, which is simply intolerable and of course we intend to fight it."
There had been a muted reaction across European markets to the announcement of the eurozone's €110bn Greek rescue package this weekend.
The panic hit yesterday with indices tumbling across the region as fear increased that other indebted countries, including Spain and Portugal, would follow Greece.
HSBC's strategist Phil Poole said: "These measures were not delivered early enough to prevent Greece from being priced out of financial markets and considerable damage being done, which has made the longer-term adjustment even more difficult."
Mr Zapatero said: "Spain has a public debt to GDP ratio 20 points lower than the European average." While the country's debt burden is half that of Greece's, his comments failed to soothe the markets.
Portugal's PSI 20 index fell 4.6 per cent. The CAC 40 in France was down 3.2 per cent and Germany's DAX was down 2.6 per cent. The euro slumped to its lowest level in a year.
The FTSE 100 suffered its largest one-day fall in five months. The blue-chip index of largest companies on the London Stock Exchange fell 2.6 per cent to 5411.1 points. This marked the biggest single drop since 27 November when it lost 3.1 per cent in one session.
Tim Hughes, the head of sales trading at IG Index, said: "The nagging problems surrounding Europe are still yet another concern for investors with clear concern that the debt problems must surely raise their heads in Spain and Portugal. This worry does not look like it is going away."
Beyond the fear of European contagion, London's shares were dragged lower by the top index's heavyweight mining companies and a slide at the oil giant BP in the wake of the spill in the Gulf of Mexico.
Rio Tinto gave up 6.4 per cent and BHP Billiton fell 7.9 per cent on the first UK trading session after the Australian Prime Minister, Kevin Rudd, announced a 40 per cent tax on mining company profits from 2012.
The miners were also hit by a drag from China. Shares fell after the country's central bank said it was to increase bank reserve requirements for the third time this year. The Shanghai Composite Index was at a seven-month low after the central bank lifted reserve levels by half a per cent, raising concerns over the economy.
Despite positive economic news, Wall Street was swept up by the pervading mood, and the Dow Jones Industrial Average was dragged 2 per cent lower shortly after it opened.
Gold prices soared to record levels as investors flocked to the precious metal for security. The prices in sterling, euros and Swiss francs were at all-time highs, while in dollars it was at its highest since December.
The cost of insuring the debt of eurozone countries, including Spain and Portugal, with credit default swaps, also soared.