Stocks markets drop amid eurozone bond tension

European stock markets slid on Thursday amid record tensions on the eurozone bond market and risks from debt contagion hours before a key policy speech by the new Italian prime minister. Investor sentiment was already under pressure after ratings agency Fitch warned overnight that US banks could be exposed if the eurozone crisis intensified. The critically important spread between German and French borrowing rates indicated on the market for existing bonds rose above 2.0 percentage points. Meanwhile Germany warned Italian Prime Minister Mario Monti to move fast to enact the policies he was to announce later in the day to stop Italy sliding further into a debt trap. The eurozone crisis shows little sign of respite and there is a real risk of an escalation in the crisis," said Neil MacKinnon, an economist at Russian financial group VTB Capital. In late morning deals, London's FTSE 100 index sank 1.42 percent to 5,430.68 points, Frankfurt's DAX 30 shed 1.37 percent to 5,834.85 points and in Paris the CAC 40 dropped 1.73 percent to 3,011.99. But in foreign exchange trading, the euro edged up to $1.3463, from $1.3451 late in New York on Wednesday. It had fallen overnight to $1.3422 -- which was the lowest level since October 10. Spain's treasury had to pay a record interest rate of 6.975 percent at a new debt issue when it raised 3.563 billion euros ($4.808 billion) with 10-year bonds on Thursday. The government had hoped to raise between three and four billion euros with the bond sale and the interest rate paid is the highest since the creation of the euro single currency, according to Dow Jones Newswires. "Spain's debt auction will do nothing to settle nerves in Madrid," said research director Kathleen Brooks at trading site Forex.com. "The yield investors demanded to hold 2022 debt was 6.97 percent -- millimetres away from the crucial 7.0-percent level considered to be the threshold that could push Spain to needing a bailout. "Spain still has 12 billion euros of debt to auction next month, if sentiment does not start to pick up then we could see funding stresses reach a critical level in Madrid very quickly," Brooks added. France was meanwhile due to issue between six and seven billion euros in five-year bonds later in the day, in another key test of market confidence in eurozone financial management. Despite new governments taking over in Italy and Greece to push through key reforms, the cost of borrowing for under-pressure countries remained dangerously high. Italian benchmark 10-year bond yields once again topped 7.0 percent on Thursday, while in Spain -- whose massive debt and crippling unemployment has also come into focus -- the cost of borrowing has hit 6.66 percent. Bond yields remained above or close to the 7.0-percent danger zone considered unsustainable for governments to service their debts. And in another gloomy signal, the gaps in borrowing rates on German government bonds and those of France and Spain hit the highest levels since the creation of the euro amid acute strains over eurozone debt. Asian stock markets closed mixed on Thursday but trading was cautious after two ratings agencies sounded alarm bells over the potential impact of the eurozone debt crisis on major banks. Tokyo finished 0.19 percent higher, Sydney rose 0.25 percent and Seoul added 1.11 percent. But on the downside, Hong Kong fell 0.76 percent and Shanghai closed 0.16 percent lower. Fitch warned that the contagion effects on US banks were "potentially large" if the crisis spreads beyond Greece, Ireland, Italy, Portugal, and Spain. It pointed to the risks in France, where banks are being weakened by their own eurozone exposure, while Paris is cutting spending to avoid losing its AAA credit rating. Fitch said the top five US banks had $188 billion in exposure to France at the end of the second quarter, $114 billion of it to French banks. Wall Street's three main indexes ended lower on Wednesday following the announcement, with the Dow Jones Industrial Average off 1.58 percent, the S&P 500 down 1.66 percent and the Nasdaq losing 1.73 percent. Adding to the sense of fear was Moody's decision to downgrade 10 German public-sector banks, saying they were now less likely to receive state support if needed. There was a little respite in Europe after Italy's new Prime Minister Mario Monti put together his new cabinet charged with pushing through legislation aimed at putting the economy back on an even keel. And in Greece, the newly installed premier Lucas Papademos kicked off talks with international banks on reducing the country's mountain of debt, after winning overwhelming support from parliament in a symbolic vote of confidence, but reports said progress was snagged on details of how the banks will take their losses.