European stocks slump, Wall Street falters

In the eurozone, the Frankfurt DAX 30 index shed 2.33 per cent, the Paris CAC 40 index lost 2.84 per cent, Milan' FTSE Mib index plummeted 3.96 per cent, Madrid Ibex 35 slid 2.69 per cent and Lisbon's PSI-20 fell 4.28 per cent.

London's FTSE-100 fell 1.03 per cent, closing at 5,929.16 points.

"We find ourselves at one of the worst moments of the European monetary crisis. The idea of a contagion from the Greek crisis to other eurozone countries like Italy and Spain is gaining ground," said Jean-Francois Robin, fixed-income strategist at Natixis in Paris.

On Wall Street, the Dow Jones Industrial Average fell 1.11 per cent to 12,516.66 in afternoon trading.

The broader S&P 500 shed 1.61 per cent to stand at 1,322.10, while the tech-heavy Nasdaq Composite dropped 1.75 per cent to 2,809.82.

In Italy, bank shares suffered the sharpest falls. Shares in Intesa Sanpaolo fell by 7.01 per cent and in UniCredit 5.92 per cent. These are the two biggest banks in the country.

"Italy has become the new pressure point in Europe's debt crisis," said Jan Randolph, head of sovereign risk at IHS Global Insight consultancy in London.

Investor concern rose further after German Chancellor Angela Merkel said she had told Italian Prime Minister Silvio Berlusconi to ensure Italy's parliament approved an austerity budget to send "a very important signal" to the markets.

The Italian government earlier this month announced a four-year austerity budget in a bid to reduce the budget deficit to just 0.2 per cent of output by 2014 from 4.6 per cent last year.

Randolph pointed out that there was "no real new fundamental basis in Italy for this market aversion towards Italy"

He said: "What this really is about is a crisis of confidence."

In Spain banking shares were also the worst hit, with Santander dropping 3.16 per cent and its main competitor BBVA falling 4.06 per cent. CaixaBank shares fell 5.29 per cent.

But the big news was on Spanish 10-year bonds, where yields rose above 6.0 per cent for the first time since 1997.

In Paris, all companies comprising the leading CAC-40 index fell. Credit Agricole bank dropped 7.66 per cent and BNP Paribas tumbled 6.25 per cent.

"A real wind of panic blew across the financial sector provoked by the spike in Italian and Spanish yields on the bond market which has showed the way for crisis contagion," Guillaume Garabedjian, portfolio manager at Meeschaert said.

In Brussels, eurozone leaders hoped to head off fresh worries of debt crisis contagion by seeking to iron out widening differences over the outline of a second Greek rescue package.

"The euro has come under heavy selling pressure today as investors take fright on two accounts: firstly, that EU ministers are becoming more comfortable with the prospect of Greece defaulting on part of its debts, and secondly that pressures are spreading from the core to the periphery, especially to Italy," said Forex.com research director Kathleen Brooks.

The Brussels talks will focus on the question of possible private-sector involvement in a second bailout of Greece -- with a deal not expected before September.

In London on Monday, which managed to sidestep the worst of the European falls, BSkyB's shares plunged more than seven per cent, but recovered slightly as Rupert Murdoch fought to keep alive his bid for the British pay-TV group amid a phone hacking scandal at News Corp.'s News of the World newspaper.

At the close, BSkyB had slumped to 715.50 pence from 750 pence at the close on Friday, a drop of 4.6 per cent. For a time it had fallen below the 700-pence a share offer from Murdoch's News Corp. for the 61 per cent of BSkyB it does not own.

In Asia, Tokyo closed 0.67 per cent lower at 10,069.53, Sydney dropped 1.56 per cent.

Hong Kong fell 1.67 per cent, but Shanghai gained 0.18 per cent thanks to a surge in airline shares following reports that the government will invest heavily in the sector.